Does Every Board Need an Activist?

One CEO I spoke with, who had a fair amount of activist experience, implied that he found them to be a nuisance and overrated. He said they would dip into his stock, ask for meetings, weigh in and then move on. He didn’t find them particularly well prepared or insightful. He also noted that they ultimately went away and left him to continue running the company.

Critics of activism often cite activists’ length of shareholding as cause for concern; many don’t stay in a stock for very long. Some critics believe that activists are really just interested in boosting the stock price in the short-term.

Another CEO I met had a different reaction. He was not at all concerned about activism having a negative effect on his company. In fact, he seemed to embrace all elements of activism. In his case, he has some real, live practicing activists on his board—individuals with private equity backgrounds who spend their careers buying and selling companies and looking opportunistically around the market. He said that the activists have offered good ideas about how to unlock shareholder value and that the board has tapped their expertise about the business.

Proponents of activism believe that activists can offer insight into a company’s weak spots (e.g., underperforming or disconnected businesses, whether the company is innovating at the same pace as its competitors, poor corporate governance), which, if addressed properly, might improve shareholder returns.

He also said that every company and board should be thinking like an activist. He believes it’s the only way to stay two steps ahead of what is going on out there today—critically looking at the company’s businesses as an activist would to understand what risk factors might be attractive. He feels that’s the only way to succeed in a dynamic and fast-moving market.

Both CEOs thought their approach was working well, and they were quite confident in their positions. This wasn’t surprising, since CEOs are generally strong leaders and should have a fair amount of conviction about their views. The first one thought his team was smarter and more knowledgeable than any activist could be, and the second one thought he had discovered the secret to success by putting an activist on his board.

In the end, the CEO who was supportive of activism was delivering stronger shareholder returns over a multi-year period. What does that say about keeping your friends close but your enemies closer? Maybe it means that every board could benefit from at least thinking like an activist.

Editor’s Note: A recent Wall Street Journal study agrees with PwC’s study to a degree. Their study found that, for two Silicon Valley investors, being nice works better than attacking. The Journal survey, which reviewed U.S. activist targets with a market value of more than $5 billion, found that shares of companies targeted by ValueAct Capital Management LP and Relational Investors LLC often outperformed their peers. ValueAct and Relational, which typically eschew bitter public battles in favor of working with management behind the scenes and “quietly working their way into the board room,” were among the most successful at getting on the board of target companies.

In addition, The National Association for Corporate Directors (NACD) released a 2015-2016 company governance survey recently showing that more than 20% of respondents’ boards were approached by activist investors during the past year, yet 46% of those surveyed have no plan in place for responding to activist investor challenges.

View PwC’s recent paper: Shareholder activism: The who, what, when, and how
Try PwC’s Shareholder Activism Risk Assessment Tool
View the Wall Street Journal’s Activist Investor Report Card
Go to the 2015-2016 NACD Public Company Governance Survey