Financial Profiles President Moira Conlon was the keynote speaker at a recent event sponsored by the National Association of Corporate Directors and Broads Circle. The 4th Annual Women on Corporate Boards event featured presenters Robin Abrams, Larraine Segil and Beth Bronner, who shared valuable insights about their experiences serving on corporate boards and the increased threat of activist investors. Other speakers included Fay Feeney, CEO of Risk for Good; Katherine Blair, Managing Partner of K&L Gates; and Darya Allen-Attar, Founder of Broads Circle.
A summary of the opening remarks follows:
Activist investors have been around a long time, but with todayâ€™s instant media at their disposal they get a lot of attention very quickly. And they certainly have a first mover advantage if a company is both underperforming and out of touch with its shareholders.
Basically here’s how it goes: An investor – usually one who has built up a sizable position in the company’s stock – is dissatisfied with the companyâ€™s results and thinks he/she has a better solution to unlock shareholder value.
The activistâ€™s first approach to management and the Board might be a softball letter filled with hardball facts about how the company is losing competitive traction or should spin off an underperforming business and give the cash back to shareholders.
The company under attack usually counters with something like, “Thanks for your observations â€¦weâ€™ll get back to you shortly. Of course weâ€™re dedicated to creating value for our shareholders.â€ This is when most companies start to mount their defense if they believe an investor has the ability and grit to go against them.
Meanwhile, what management may fail to realize is that the company is already in play. Before the opening gambit, the activist investor has already plotted a course of action and has spoken to other investors who own the stock about their point of view. The ultimate goal of an activist is to get a better return on investment by directly influencing the direction of the company.
Activists have specific solutions in mind. They might ask the company to sell itself outright or spin off an asset; give excess cash back to shareholders through dividends; oust senior management or other board members; and/or remove poison pills or other defenses.
They also have varying approaches. There are high profile cases that you read about in the headlines. These activists are prepared to win at all costs â€“ firms like Relational Advisors or Third Point. Then there are lower profile activists, who you donâ€™t hear about as often, but who will fight and go public if needed. These campaigns are not always led by hedge funds; sometimes itâ€™s a long-term value manager whose patience has run out. Finally, itâ€™s important to note that no company is safe from an activist attack based on size.
According to Activist Insight, last year activists invested an estimated $12 billion in targeting companies as diverse as Yahoo, Canadian Pacific, Adobe, and P&G. Of the 135 high profile activist campaigns in 2012, 58 were seeking board representation. In 45 of these cases activists were successful in getting a nominee or nominees elected to the board.
So, what can a company do to proactively avoid an activist campaign and a potential proxy fight?
- Practice an engaged form of investor relations. Consistently and clearly articulate your companyâ€™s business and value creation strategy and consider investor sentiment in this process. Build strong relationships with your institutional holders by meeting with them face-to-face frequently, in good times and bad.
- Listen carefully and respond thoughtfully in all investor interaction. This includes monitoring analyst reports and paying attention to patterns of questions and suggestions received during conference calls and roadshows.
- Keep track of who owns your stock. Use stock surveillance and always be on the lookout for activist investors.
- Know that poor relative performance for any reason can make you a target. If performance is an issue, address the problems head on with your solution. You have to be proactive about this or you just might attract solutions from activists.
- Practice good governance and review potential proxy issues well ahead of proxy season.
- Have a plan and resources in place to respond to an activist attack. Donâ€™t wait until it happens.
If an activist does come knocking at your door:
- Know that proxy fights are costly in terms of time, money, distraction and reputation, and that the main objective is to avoid one.
- Engage in an open dialog. Understand the motivation and point of view of the activist investor. Do your research before speaking to an activist investor so you know who youâ€™re dealing with and what their agenda might be.
- Remember that many of these activists are highly intelligent and their concerns are often legitimate. Sometimes Board action is an appropriate response as we recently saw in the case of Groupon, where the Board fired founder and CEO Andrew Mason.
- You donâ€™t need to give activist investors special access, but you do need to treat them the same as you would other investors.
A few of our clients have been targeted by activists. Most of the time, the company has prevailed, sometimes with concessions such as Board seats. Regardless, companies with a plan in place were able to avoid a full-blown proxy battle. More often we have been engaged at a crisis stage and all we can say about that is that once the horse is out of the barn itâ€™s an expensive and volatile situation.
So whether you are concerned about current investor sentiment surrounding your companyâ€™s stock, dealing with an activist investor, or simply interested in taking a closer look at your investor base to identify vulnerabilities, contact Financial Profiles.
Robin Abrams, Board Director for: HCL Technologies; Unwired Planet, Inc.; Sierra Wireless, Inc.; FactSet Research Systems, Inc.; and Lattice Semiconductor
Larraine Segil, CEO of Little Farm Company; Board Member for: Frontier Communications; National Association of Corporate Directors (NACD) Southern California section; Foundation Board of The Committee of 200; Board of Governors of Cedars Sinai Medical Center; Advisory Board of Edgecast, a Content Delivery Network Company (CDN)
Beth Bronner, Managing Director, Mistral Equity Partners; Board Member for: The Goodman Theater; Presidentâ€™s Advisory Council of Vassar College; Marketing Steering Committee of The University of Chicago Booth School of Business