Consider elements from an activist’s agenda that you can adopt, leaving him or her with fewer complaints and suggestions. Activist investors often have reasonable ideas worth considering, so be open to contemplating those ideas objectively.
The hardest “suggestions” usually are requests for changes to the board. As noted earlier, preemptive board refreshment is often the best medicine. Post-activist unilateral appointment of new directors is certainly not as good as preemptive board refreshment, but it’s still better in many cases than remaining static with a board slate that is difficult to defend. Consider the options of agreeing to a third-party board candidate approved by both sides, setting a plan of refreshment, or appointing an alternative stockholder representative.
If you find yourself embroiled in a full, public proxy battle, early moves and press releases will set the tone and shape the future course, so contemplate them carefully with input from advisors.
“the costs OF A PROXY FIGHT often run $4m-$6m for a full campaign at a mid-cap company.”
We generally believe that canned press releases or attacks on the activist do not work. Today’s capital markets are sophisticated about activism, and these tactics, along with ad hominem attacks or pro forma pledges of fidelity to shareholders, no longer help a company.
Moreover, tactics from a bygone era are usually received poorly by shareholders and likely will be counterproductive. Suing an investor, for example, is almost always a bad idea. Adopting a poison pill, changing advance notice provisions, or adopting last-minute bylaw changes to thwart a shareholder also generally backfire. Shareholders now expect a substantive response to criticisms and suggestions. Respond to the shareholder on the merits.
Responses that work include the following:
• provide transparent, honest disclosures about the board’s rationale for its decisions and actions;
• demonstrate recognition of performance challenges with a clear plan for fixing them; and
• show how value will be created with the current plan, capital structure, management, and incentives.
Careful analysis of your shareholder base can prove critical in knowing how to shape the message and win votes. Stock surveillance services can aid in watching trading to ensure management knows where the stock is.
Finally, be sure to use the independent directors’ voice, especially if there is a strong history of board self-refreshment and shareholder board support. Use a director to sit down with shareholders and explain strategy (and paths not taken), operational performance, executive pay plan design and succession planning. Show the shareholders that the Board is thinking actively about all of these critical areas and
working hard on behalf of shareholders.
BE PROACTIVE AND VIGILANT
There’s no doubt the past decade has seen enormous change in the relationship between shareholders, management teams, and boards. In this new era, more than ever, it is important for boards to be well composed, for companies to contemplate all value creation opportunities and for all capital market actors to recognize that good ideas can originate both inside and outside the company.
Smart corporations take the lead, shaking up their own strategies, boards, governance, and engagement rules—before activists force them to.