Boards Overseeing Major Stock Price Declines Should Expect Activist Challenges

Corporate boards that have experienced significant stock price declines over the last 12 to 18 months may find themselves in a similar position as the HanesBrands board, which is facing sharp criticism from an activist investor. Corporate boards no longer get an automatic “benefit of the doubt” when attempting to navigate companies through unfavorable market conditions—corporate directors are expected to quickly implement strategies that mitigate risk and protect shareholder value. If they fail, the experience level and credibility of the board and the CEO will likely come under attack. Their jobs are very much on the line.

HanesBrands has come under fire from activist investor Barington Capital Group, which is demanding the board reduce expenses by at least $300 million per year, reduce inventory by the end of the year, pay down debt and improve the company’s gross margins at a faster pace. In a letter to the HanesBrand’s board chairman Ronald L. Nelson, Barington Capital complained that the company’s stock price had dropped more than 51 percent in the last year “due to the Company’s largely ineffective response to recent market challenges, poor operating performance, and excessive debt burden. Unfortunately, the underperformance cited by Barington Capital has come while the company’s “Full Potential Plan,” which began in 2021, is being implemented.

According to the press release, “Barington believes the Company may need to retain a new Chief Executive Officer and add directors with the relevant skills and industry experience required to implement its plan to create long-term shareholder value.” This campaign by Barington Capital may influence shareholders and other potential investors to have “no confidence” in the leadership of the HanesBrand board and CEO.

Planning For Setbacks Is Not A Negative

Obviously, HanesBrands would have wanted to avoid having shareholders publicly broadcasting why they believe the board is lacking and what their solutions to the company’s problems would be. Boards will make mistakes – the key is keeping the errors to a minimum. This is a reminder to all companies that it is in the company’s best interest to have a crisis management strategy to implement in case an activist investor challenges the board’s handling of the company’s long-term growth strategy. Corporate board members of companies that have experienced significant stock price declines over the last 18 months may want to consider the following before activist investors start a public campaign against them:

• Engage shareholders to discuss reasons for lagging performance and possible solutions as early as possible. While this seems obvious, some boards may believe they should be given time to show results—and they may not be given as much time to show results as they have in the past. Company performance is recorded every quarter, so failing to make immediate adjustments to significant losses now comes off as if the board is ignoring reality. Regular honest and open communication with shareholders can buy the board some time to find solutions to challenging market conditions, avoiding public confrontations.

• Prepare alternate strategies in case the primary strategy fails. It is the board’s responsibility to have answers if the current approved business strategy doesn’t go well. If companies can project growth, they can also project potential losses. Anticipating the worst that could happen can help jumpstart the process of coming up with additional strategies the company could use to recover from an unexpected shift in market conditions. While the idea of anticipating current plans failing may be unappealing to some directors, some shareholders might view the board having actionable alternative plans that could help the company pivot from a failed strategy as a plus. In any case, if the company’s current strategy has produced losses over the last 18 months, shareholders will likely begin pressuring the board for ways to engineer a quick turnaround. Having contingency plans will help shareholders have greater confidence in the board’s leadership.

• Prepare a statement that defends board members’ skills and experience. Activists often attack a corporate board as lacking specific skills and experience that they believe are needed to improve company performance or deal with specific crisis situations. Those attacks cannot go unchallenged. Publicly highlighting the skills and experience of individual board members can help build credibility with shareholders and others in the marketplace.