How Boards Should Respond to the New Reality of Shareholder Activism

Shareholder activism has been on the rise for several years and is now at record levels. In 2014, we saw a number of watershed events, from Darden Restaurants’ shareholders voting to replace the company’s entire board with activist investor Starboard Value’s nominees, to Carl Icahn taking on eBay, and Third Point winning three seats on the board of Sotheby’s. As one Fortune 500 board director told me, “Activism is part of corporate life today. It should be expected and anticipated by every company.”

In the past, activist initiatives usually began with an aggressive overture to management, in many cases resulting in a change of control. While this form of activism still occurs, today’s activists are taking a more constructive approach. They seek to affect positive change in a company’s performance. In this environment, boards must engage with activists through positive dialogue that addresses legitimate concerns, rather than with a defensive reflex reaction.

Forward-thinking companies will also re-evaluate and refresh their boards. Nominating/ governance committees oftentimes meet potential board members with activist experience in advance of board retirement dates and are seeking faster and proactive change of their board members.

“Best practices dictate that a game plan must be in place to prepare for and respond to shareholder activism even before an activist arrives on the scene.”

Shifting players aside, best practices dictate that a game plan must be in place to prepare for and respond to shareholder activism even before an activist arrives on the scene.

Here’s what I would suggest:

  1. Track and know your shareholders. Track who is buying your stock to get an early warning of a potential activ­ist approach. Senior leaders should be communicating regularly with shareholders to address any potential concerns. As one board member told me, “All investors are important—you should give them the audience, respect and dialogue they deserve based on their investment position.”
  2. Assess your strategy and performance. Companies must analyze their business and ask the tough questions an activist would, so they can address any vulnerable positions.
  3. Evaluate your board. By conducting an annual board effectiveness review that assesses process, structure and performance, a board can proactively ensure best in class governance and performance.
  4. Formulate an action plan for dealing with activists. Be prepared. A board member whom I know confided, “Every board should keep a game plan updated for their reaction to an activist taking a position in the company.”

After an activist is detected, companies must:

  • Act quickly! The CEO and/or chairman needs to be proactive about setting up a meeting with the activist investor as soon as his or her presence is detected.
  • Evaluate the activist and their proposal. The company should research and understand the activist’s track record, industry experience, likely tactics and methods of engaging other shareholders as soon as possible.
  • Gain alignment between the board and the CEO. It is critical that the board and management work hand-in-hand to determine the appropriate course of action. The activist could use any sign of conflict to their advantage.
  • Engage and respond. If the activist is collaborative and the proposal has strategic merit, work with them to implement any necessary governance or operational changes. If the company decides to reject the proposal, and stay its existing strategic course, it is critical to address any vulnerabilities in the shareholder base to prevent the activist from building momentum.

Editor’s note: Recently, Chief Executive was approached by a representative of The Hartford Financial Group to run an article that had been written by their former CEO Liam McGee. The article was about his experience in turning the company around when an activist investor attacked. McGee passed away in February, but his wife requested that the company move forward in publishing it. It’s an excellent case study in how to handle an activist investor in a positive, productive manner, and it serves as a good example of how to put in action the suggestions being made in the article above.

Fighting Back: The 6-Step Strategy Liam McGee, Former CEO of The Hartford, Used to Keep an Activist Investor at Bay