Analysis of new research on activist investor trends suggests that investors are questioning the ability of corporate boards to oversee their management teams, which has led to a spike in activist campaigns focusing on governance lapses and the competence of directors. The research, from corporate governance data analytics provider CGLytics, was reported by Valuewalk.com in early July.
“Governance issues such as shareholder rights, board tenure, independence, diversity and expertise are all issues to improve performance, and so are attracting activist attention,” the report states.
The report also notes: “One of the reoccurring issues that is being discussed within the investment community is whether board members have the requisite skill set to effectively carry out their oversight function over the management team. Activist investors have often questioned the experience of board members of the companies they have targeted over time. This may be related to the fact that the individuals are not the right fit for the company, or the board lacks the expertise needed to formulate strategy for the company.”
Shareholder anxiety over the ability of corporate boards to develop and execute effective business strategies for their companies has intensified as the Covid-19 pandemic continues to cause bankruptcies, business disruptions and economic uncertainty. At the same time, proxy advisory firms, employee groups and consumers have questioned the willingness of boards to push for the adoption of a number of environmental, social and governance initiatives. The result has been a notable increase in the number of activist investor campaigns over the last two years.
CGLytics data shows that the 655 activist campaigns launched in 2018 grew to 893 campaigns in 2019 – a 36 percent increase. With 797 campaigns already launched in the first half 2020, it is almost assured there will be a significant increase in activist campaigns over the total for 2019. To help prevent their company from becoming a target of the growing number of activist campaigns, boards should consider the following:
• Conduct regular risk analysis and threat assessments with your management team. Nearly all business plans have been adversely affected by the Covid-19 pandemic, so boards must be periodically brought up to date on how their CEO is assessing and dealing with the rapidly changing situation. The management team should brief the board on the top risks the company faces and the CEO’s plans to mitigate those risks. Appropriate adjustments to the business plan should be approved by the board and immediately implemented. The reasons for changes to the business strategy should be clearly communicated to shareholders and other stakeholders with the long-term benefits to the company also explained. Companies and their boards should consider developing ways of reacting more quickly to unforeseen changes brought on by the pandemic.
• Add or replace board members before activists suggest change. The need to create new strategies to deal with challenges created by the Covid-19 pandemic and the need to address new governance best practices compels all companies to take a hard look at board composition. All boards can make improvements – and it is always better to control the changes to your board rather than have changes forced upon you.
If boards feel they already have an all-star group, they should not dismiss finding a way to add another all-star that fills a future strategic need (such as experience with online sales and product development) or a perceived governance lapse (such as board independence or gender diversity).
Once boards have identified whether they will add or replace a board member, they should launch their own campaign explaining how the changes to board composition have added needed skillsets that will produce value in the near future.
The fact is that no company will operate in the same way after this pandemic comes to an end. Trying to navigate through this crisis without adding some new expertise to the board would seem to be a major mistake—and one it will have to answer for.