When Activists Come Hunting: How CEOs Should Respond

Shareholder activists have more and more heads on their wall—behold those of General Electric’s Jeffrey Immelt and Uber’s Travis Kalanick, of the most recent vintage—and more CEOs and boards are focusing energy on how not to be their next victims.

Shareholder activists have more and more heads on their wall—behold those of General Electric’s Jeffrey Immelt and Uber’s Travis Kalanick, of the most recent vintage—and more CEOs and boards are focusing energy on how not to be their next victims.

Nestle USA CEO Mark Schneider hasn’t even been able to enjoy his new job since activist investor Daniel Loeb has been pushing his plan for growth at the sluggish CPG giant behind his Third Point hedge fund’s $3.5 billion stake in the company.

Avon Products CEO Sheri McCoy’s expected early retirement comes in the wake of poor financial performance by the company—and activist shareholder pressure. And Buffalo Wild Wings CEO Sally Smith also just agreed to bow out early in a similar scenario.

“Activists have learned that it works and they have been very successful at driving change, or at least changes that enhance their returns,” said Jack “Rusty” O’Kelley, managing director of the New York office of Russell Reynolds recruiters. “And institutional investors have determined that this is something they’re willing to partner with to drive change in cases where boards and CEOs weren’t being responsive to them.”

“boards and CEOs need to genuinely listen to what activists have to say. These are smart people with very good teams who have spent a lot of time analyzing the company.”

Increasingly, in fact, activist investors are targeting the demise of CEOs and the exit of certain board members, not just changes or improvements at the company or in the stock price, as the goal of their efforts. Already through May, activists had started nine campaigns targeting top management, the fastest pace on record, according to FactSet.

It’s not just a matter of blood in the water: CEOs aren’t just being assessed for weakness by activists based on financial performance.

Another factor is that CEOs across entire industries seem to be overwhelmed these days by the speed of change. “Retail is a great example,” said Micah Alpern, principal at A.T. Kearney consultants. “So much is happening and there are so many factors you have to consider to be effective and remain relevant today.”

Also, Alpern said, CEOs are getting battered by the immediacy and transparency of digital media. “Any mistake you make, any move you make, is magnified nowadays,” he said. “That creates pressure that maybe really doesn’t need to be there. You may have just one bad quarter, but if that gains some momentum on social media, it can create pressure that maybe otherwise wouldn’t be there.”

Carol SingletonSlade, global energy and U.S. board practice leader for Egon Zehnder recruiters, said that activists also are applying new criteria for gauging the performance of CEOs in addition to traditional financial measures.

“CEOs across industries are measured against how they have led their organizations through digital transformation, if their business strategies have allowed them to remain relevant amid constant disruption, and at the same time, how well they have been able to maintain company culture while being under intense pressure to perform and remain agile.”

How should CEOs respond?
So what should CEOs and board members do? How should they act before they’re targeted by activists and once they are? Here are 6 pointers.

1. First, listen. Once approached, boards and CEOs “need to genuinely listen to what activists have to say,” O’Kelley said. “These are smart people with very good teams who have spent a lot of time analyzing the company.”

Dennis Zeleny, a consultant to CEOs and boards on compensation, culture and corporate change, said that “engagement is necessary no matter what. Long gone are the days when a CEO or board can ignore activists as non-credible and hope they go away. They just don’t go away.”

And in fact, boards and CEOs often have been considering the very prescriptions made by activists. But sometimes, O’Kelley said, they can’t disclose that to the investors—at least not yet.

2. Don’t count on a quick fix. Activist shareholders, having stalked their quarry often for years, aren’t going to go away just because a CEO proffers some idea for quickly changing the equation, such as spinning off an operation or announcing a new cost-cutting goal.

“There rarely are successful transformations that take only a quarter or six months,” Alpern said. “Most take two or three years.”

But it’s a good idea to go for a quick win if it’s available. “You need stories to show your plan is having an impact, that it’s successful,” Alpern said. “You can’t just say ‘give it three years and trust me’—that won’t put activists off.”

3. Be steadfast. Typically, CEOs have skills and ego strength that helped get them to the top. They may need to bring all of that to bear and more to survive scrutiny or a campaign by activist shareholders.

“They need to say to directors and shareholders, ‘We have this plan, and here are the proof points of why I know it can work,” Alpern said. “And they should say to the board, ‘I know how to deal with this. That’s why you hired me.’”

4. Emphasize succession. Boards and CEOs should heighten their attention to succession planning as one defense against shareholder activism.

“It’s the best defense,” SingletonSlade said. Being armed “with a succession plan that identifies, cultivates and selects candidates desired by investors [creates] an opportunity to have a voice in selecting a candidate with competencies best suited to lead” in the event of a CEO shakeup.

5. Regularly engage all shareholders. If CEOs don’t have a regular plan to inform and engage shareholders beyond annual meetings and quarterly reports, O’Kelley said, they should create one. “Shareholders are aware if you’re trying to avoid engaging with them,” he said.

6. Have a plan. CEOs must be harboring a game plan for when they’re engaged by activists. “Talk about strategy and [how to handle it] with all your constituencies,” Alpern said. “And you can’t just be a visionary—you also have to show results.”

Zeleny said that if a dispute turns into a proxy fight, “be prepared to spend a great deal of money. And it will take more of the CEO’s and board’s time than they can imagine. Make a plan for this so that proper focus on the business is not lost.”

Yet, Zeleny said, “If CEOs and boards show they’re listening and being responsive and that they also have a better path forward, they will win the day.”



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