6 Steps for Successfully Negotiating With an Activist Investor

As public company CEOs and their boards know all too well, shareholder activism is here to stay. Activists currently have $120 billion under management—up 30 percent in the past year—and more money is flowing into their coffers every month.

Of course, a CEO’s initial reaction to an activist’s phone call or letter may be to protect the status quo, which may not be unreasonable. After all, activist demands often put a chief executive’s long-term strategic plan at risk. And, activist approaches often resemble hit-and-runs—the activist comes in, attacks and drives away with value from having temporarily inflated the stock price. Some add insult to injury; for example, Dan Loeb of Third Point LLC, is notorious for his nasty letters to CEOs.

If approached, it’s critical that the CEO and board be well advised and accurately establish their best alternative to a negotiated agreement. However, before launching an all-out offensive, both sides should consider a middle path. No one has a monopoly on wisdom, and often an activist will have a worthwhile suggestion. Moreover, being willing to listen to properly presented ideas from a significant shareholder is part of a CEO’s and a board’s fiduciary responsibility.

“Some companies are good at reinvesting in employees, but it’s about helping them become better employees.”

BUILDING TRUST BETWEEN PARTIES
The cornerstone to a successful outcome in any negotiation, whether mediated or not, is building trust between the parties. And, common ground, if it exists, can be brought to light quickly if CEOs and activists follow some proven alternative dispute resolution techniques. Here are a few from the mediator’s playbook:

  1. Allow each party to express its perspective.
  2. Have each party share its objectives and look for overlap.
  3. Identify the issues that need to be resolved.
  4. Jointly brainstorm potential solutions to each issue.
  5. Assess alternatives and test for alignment with objectives.
  6. Select a solution that meets each party’s minimum requirements.

Even if the approach is an unwarranted attack and not necessarily in the interests of long-term shareholder value—as many felt was the case with DuPont Co., which recently won out against activist investor Nelson Peltz’s Trian Fund Management—taking time to hear out and understand an activist’s rationale may help CEOs and their boards address broader shareholder concerns or, if appropriate, mount a more effective defense.

Experience has shown that we should demand less confrontational methods of conflict resolution from both sides, rather than prolonged, expensive and counterproductive legal battles. After all, as independent shareholders, we are the majority owners of the company.

Liam McGee, former CEO of The Hartford, no doubt used some of these techniques in 2011 when he was approached by activist John Paulson of Paulson & Company. Instead of ignoring Paulson, McGee had his team thoroughly analyze and test Paulson’s ideas. Then he worked harder on his own reorganization plans and negotiated behind the scenes with Paulson instead of fighting in the media and circling the proverbial wagons.

Sometimes little common ground exists between the two sides, and a public confrontation will likely follow. However, as soldiers from von Clausewitz to Colin Powell have long known, war is the politics of last resort. And, those of us in the corporate world would do well to keep this maxim at the forefront of our minds.

Read more:
Dan Loeb’s Top 10 Most Scathing Letters
Fighting Back: The 6-Step Strategy Liam McGee, Former CEO of The Hartford, Used to Keep an Activist Investor at Bay

Tad L. Kelly :Tad Kelly, a certified mediator, is a co-founder and managing partner of CHB Capital Partners in Denver. He has many decades of public and private company board experience and previously worked with the investment arms of the Bass Brothers, Richard Rainwater and related entities. He can be reached at tlkelly@chbcapital.com.