If you’re a public company, or may be one someday, it’s a safe bet that at some point, you’ll have to deal with at least one activist investor. More and more, they’re winning seats on boards. In fact, the success rates of activists have nearly doubled over the past five years.
With this evolution, it’s critical to develop strategies for dealing not only with activist funds, but also with their human proxy in the seat next to you. Here are 8 ways to make the activist marriage work.
1. Work to get along. Following the election or appointment of an activist director, both sides generally are interested in attempting coexistence. This is a worthy goal and companies should resist efforts by any director to create an “us-versus-them” mentality. Coexistence generally makes sense for the activist, who usually has only minority board representation and therefore needs allies to push its agenda. Conversely, there may be genuine appreciation for the ideas the activist brings to the boardroom. Companies also are keen to avoid antagonizing the activist in the hopes of avoiding further hostility or in an attempt to limit aspects of the activist’s agenda.
2. Speak with one voice. Activist funds that seek election to a company’s board often will have established close relationships with, and sometimes garnered strong support from, other shareholders, as they publicly push for a change agenda. At other times, they may reach out to potential acquirers of the company to entice them to act. Boards should remind directors that they should not individually speak to investors, analysts, the media, or others on behalf of the company, unless specifically authorized to do so, and that doing so could embarrass the company, create a perception of divisions, or lead to violations of federal securities laws and fiduciary duties.
“be open to a constructive working relationship but don’t be afraid to push back if the activist director abuses that trust.”
3. Adopt a board confidentiality policy. Companies are increasingly adopting board confidentiality policies, either as standalone policies or as part of broader conduct or governance codes. Have each board nominee agree to the confidentiality policy, through an undertaking or even a bylaw requirement. If there is a settlement agreement with the activist, it often will require its nominees to abide by board policies. These policies should define confidential information broadly to include all non-public information that the director learns through board membership, and should clearly express that the policy covers both confidential company information, such as financial and operating information or trade secrets, and confidential board information, such as discussions and deliberations of the board.
4. Share information equally. Boards generally expect that the activist director will be more active, and often will have the benefit of a team of analysts at the activist fund, that can analyze data and produce information that other directors can’t. However, while insightful leaders do emerge, it’s more important to try to create a level playing field to ensure that, as much as possible, each director receives the same information and feels adequately prepared for meetings and decisions.
Companies should require that all information requests be routed through a central source, such as the general counsel or the CFO, and not permit direct phone calls or emails to other executives, unless specifically authorized. Businesses sometimes include rules about director access to management in their corporate governance guidelines. Also, make information that is provided to the activist director also available to all other directors.
5. Know the difference between an insider and an outsider’s agenda. Independents who are nominated by, but don’t work for, the activist—sometimes referred to as activist outsider directors—generally try to maintain a reputation for integrity and independence, even when nominated by activist funds. While recognizing that personal or professional ties, and common views, may exist between an activist outsider director and the activist that recommended them, treat the activist outsider director as independent of the activist— unless proven otherwise—to potentially dilute any allegiance to the activist.
6. Have an onboarding program for new directors. Engage in robust onboarding efforts with new directors, with onsite meetings with management and outside advisors, to ease the transition to the first board or committee meeting. Also, consider briefing new directors on any strategic issues before the board. The CEO and lead director also should make extra efforts on a personal, one-on-one level to welcome new directors.
7. Flesh out and diffuse any conflicts. Potential conflicting fiduciary duties present issues that boards are increasingly navigating. It sometimes is helpful for the general counsel of the company to maintain an open dialogue with the general counsel of the activist fund, who is often a key ally in mitigating legal risk. Identify the potential conflict early by ensuring that your code of conduct requires directors to provide advance notice of any potential conflicts.
8. Ensure that the activist director does not hijack the agenda. Preferably at least two, and sometimes a majority of directors, should be required to call a special meeting. The activist director also may request to add items to the agenda. Board and committee agendas are typically determined by some combination of the chairperson (or lead director), CEO, and committee chairs, as appropriate. These requests are often granted if reasonable. Review your committee composition and mandates to ensure an activist director can’t hijack an important topic with an outsized influence on a committee compared to the full board.
Activist directors may also push to change advisors (arguing for a “fresh perspective” on issues where they may disagree with current strategies), seek to change the composition of the board or committees, or make changes to the company’s governance documents. The company, led by the chairman or lead director, needs to be mindful that only the full board is responsible for taking these actions.
In short, be open to a constructive working relationship but do not be afraid to push back if the activist director abuses that trust. Or, as Reagan famously said, “Trust, but verify.”