For many boards, it is their worst nightmare.
Activist investors have a long and not always distinguished history. At best, activist approaches have been seen as battles. They bring to mind epic showdowns such as those in the US between Carl Icahn and Dell Computers or Dan Loeb at Sotheby’s. In the last couple of years, we have seen similar examples emerging in the UK between Edward Bramson and Electra, as well as Elliott Partners and Alliance Trust, both of which have resulted in wholesale board and business change.
Les dramatic, but no less impactful, an activist campaign can easily feel like a rebuke. An outsider with no knowledge of your company thinking they can do a better job. Who are they to know? The travails of Pershing Square and ValueAct Capital at US pharmaceutical firm Valeant show that the activists aren’t always right.
But, the truth is that the majority of today’s activists are genuinely targeting improvements in strategy, operational performance or financial results. The old stereotypes of asset-stripping corporate raiders are rarely accurate today.
And as activist investors have evolved, the responses of target companies need to change too. Whereas once the default reaction was to close ranks, today engagement is generally a much better option.
This is partly due to a sharp increase in the rate of activist approaches. Between 2010 and 2015, we have seen compound annual growth of 20% in the number of activist campaigns worldwide. In 2016 alone, one study showed that over 750 companies around the globe were publicly subjected to activist demands.
The frequency of activist approaches means they can no longer be seen as a ‘black swan’ event. This is particularly the case in the UK, where there is a strong history of shareholder engagement and where companies are having to update their business models not only in response to technological disruption, but also to the challenges brought about by Brexit.
Boards can, and should, be prepared.
But what concrete steps can they take? Here are five top tips to make sure that you are ready to respond when the barbarians arrive at the gate.
1. Have the right skills and people in place
With activist approaches on the rise, having an experienced board is a must. They must also be able to speak up when necessary, ensuring that any threat can be properly discussed, thought through and reacted to with one voice.
A board must also be diverse, not just in terms of demographics but also in terms of experience. Having a management team with varied backgrounds in fields such as private equity or hedge funds will allow for more effective discussions and responses.
2. Think like an activist, and plan ahead
You should deal with an activist investor in the same way that any good business reacts to a challenge; think about the threats facing you and build them into the business plan. Anticipating danger and having a planned response is better than waiting for the storm to hit.
So what’s the best way to plan ahead? Invest your time and effort into thinking like an activist. Ask yourself why an activist would target your business and how they’d go about it. Then you can put in place a plan for reacting calmly in the event of an approach.
3. Listen to the proposals
You need to listen to the activist: bring their lens into the boardroom and try to see what they are seeing. The temptation to close ranks and ignore the threat will be there, especially when the board is unanimous in its opposition to the approach.
However, the truth is that many activist threats may add value in the long term. Instead of ignoring them, consider for a second that maybe the activist has identified a genuine weakness in that needs addressing. Instead of handing the initiative to them, take charge of the situation yourself. Use the approach as an opportunity to embrace new ideas, implement change and learn.
This could be the greatest thing that ever happened to your business.
4. Seek external counsel
An activist event can feel like a siege. In this climate, the advice of the non-executive directors on your board can be crucial. The benefit they bring comes from experience, and often the cross-sector and varied CVs which made you welcome them into the company in the first place can play a vital role in warding off threats.
Non-executive directors do not spend every day at your company, and provide an opportunity for perspective to an otherwise inward-looking group. Instead of suffering from the hive mentality that can afflict executives, they offer a valuable external voice. They are more likely to have experienced this before, and their knowledge of the do’s and don’ts involved may turn out to be crucial in forming a response.
5. Communicate Clearly
Most activist events are linked to underperformance. Whether you’re outperforming the market or not, any company that is not turning a profit is potentially at risk.
So make sure you’re open and honest. If you’re addressing major business issues, ensure that shareholders know this and how you’re doing it. That way you build a connection with the people you’ll need to be in your corner when the time comes.
Moreover, activists prey primarily on businesses they feel are vulnerable due to mismanagement. Making sure you’re speaking in one, clear voice is the most effective way to be strong.
Malcolm McKenzie is managing director at Alvarez & Marsal