Prepping For Pillagers

At the close of 2022, we saw investor activist campaigns ramp up for a record number of attacks on corporate America, with high-profile firms Alphabet, Meta, Paypal and Disney among the 235 targets. Directors are regularly caught unprepared and overwhelmed by confusing activists’ media campaigns.

While pioneer activists like Robert Monks, Nell Minow and Ralph Whitworth championed needed transparency and accountability to counter board cronyism, absenteeism and corruption, today’s activist investors are more akin to 1970s leveraged buyout greenmailers raiding healthy businesses at a brief moment of weakness to shake down the board, change out leadership and heave off healthy business units at fire sale auction prices to snag a quick buck from the resulting stock price pop.

DuPont CEO Ellen Kullman, a 27-year veteran of the company, was pushed out this way, despite achieving a record 266 percent total shareholder return during her six years, beating the 165 percent return for all S&P 500 firms and delivering the third-highest shareholder return of all world’s top chemical companies. Activist Nelson Peltz’s firm Trian pounced on a two-quarter downturn, insisting that DuPont’s famous labs—the source of a third of DuPont’s product line and costing only 0.7 percent of sales—be shuttered.

A similar activist campaign Peltz launched against Disney this year failed after he mischaracterized Disney chief Bob Iger’s widely celebrated performance record. Iger had achieved cumulative total shareholder returns of 554 percent during his tenure, in contrast to Peltz’s own troubled track record, as at least half of the companies on whose boards he served underperformed the S&P during his tenure.

In fact, four of the major activist funds targeting Salesforce—Elliott Management, Third Point Management, Starboard and ValueAct Capital—dramatically underperformed major indices, including the S&P 500, the Dow Jones Industrial Average and the Nasdaq-100, while CEO Marc Benioff’s performance was double theirs.

Instead of succumbing to intimidation boards should:

• Fight Fire with Facts. Too often, activists confuse business media, analysts and institutional investors with apples-and-oranges data comparisons of performance where they deceptively cherry-pick data to make the target company look worse and conceal their own performance. Many analysts were led to believe that Alcoa CEO Klaus Kleinfeld’s plan to spin off the new metallurgical products unit Arconic was Elliott Partners’ idea, thanks in part to the board cowering under the threat of personal attacks.

• Compel Strategic Engagement. Instead of retreating under the onslaught, at Disney Iger beat back Peltz by refusing to concede to demands and presenting a compelling restructuring plan refuting the charge that Disney overpaid for Fox Entertainment.

• Stand Up to Locker Room-Style Bullying. Regrettably, the DuPont board and the Proctor & Gamble board won expensive proxy battles against Peltz but then retreated in the face of misleading media campaigns. P&G even surrendered its board charter limits on age and number of board positions for Peltz. By contrast, Carlos Rodriguez of ADP refused to grant infinite extensions for activist Bill Ackman, calling him a “spoiled brat” who didn’t understand ADP’s business, and prevailed.

• Stand by Your Woman. It is no accident that high-performing women CEOs such as PepsiCo’s Indra Nooyi and GM’s Mary Barra were targeted by activists. Research has shown women CEOs are 50 percent more likely to be targets of activists, perhaps due to the belief that boards and institutional investors will more likely to fold on a woman leader. Pepsi- Co’s board stood by Nooyi and, as a result, avoided destroying value by heaving off international beverages or merging Frito-Lay with Peltz’s faltering Mondelez.

• Listen for Ideas. Sometimes activists identify important concerns that can inform strategy. Carl Icahn led some companies into bankruptcy and spearheaded a misguided campaign against Michael Dell, but was right to call out the board’s carte blanche for Chesapeake Energy’s Aubrey McClendon’s egregious self-dealing in 2012.

Twenty years ago, only 17 percent of boards caved in to activists. Now, thanks to media pressure and risk-averse lawyers, more than 50 percent compromise. Clearly, boards need to fortify their backbones.