5 Mistakes Boards Are Making About Shareholder Activism

Nicholas J Price
In recent decades, shareholder activism has rarely been a topic of concern. Today, shareholder activism is a lot more common. Various incidents and economic changes have eroded much of the trust that boards and shareholders long enjoyed. Shareholders of today are taking a proactive approach to board performance. The change in the relationship has prompted boards to be more receptive to shareholder activism. In fact, some board directors see value in the feedback that they get from shareholders. PwC published its Annual Corporate Directors' Survey, in which 80% of board directors indicated that shareholder activism was forcing them to take a strong look at capital allocation, strategy and execution.

The 5 Mistakes Boards Make With Shareholder Activism

Before boards can effectively engage with shareholder activists, they need to be aware of some of the common mistakes companies make that prompt shareholder activism. Following are five top mistakes that companies make:

  1. Failing to Know What an Activist Knows

In a perfect world, boards will have all the information they need, and they'll use it to make all the right choices. Along with some hard work and a bit of luck, the corporation will perform at its best. It's wise for boards to consider that activist shareholders are evaluating their company. It's in the shareholders' best interests, as well as the company's, for boards to give the same time and attention to evaluating their company that activist shareholders do.

Despite any progress, boards need to accept that their efforts are imperfect. Establishing this sets the stage for boards to evaluate where they can make some positive changes. This signals the time to look at their operating strategy, capital structure, management team, executive compensation and capital allocation. Give the proper scope to the entire operations. Do all the product offerings make sense as a whole? Has the company gotten so diverse in its operations that they're going in too many different directions to be successful?

Try to imagine being on the outside looking in. What impressions are the board and managers giving off to outsiders?

  1. Failing to Refresh their Boards

Among other things, activist shareholders will certainly be looking at board composition, which is a key weakness for many boards. Where boards regularly refresh themselves and reflect on their skill sets, risks and opportunities, activists will target fewer complaints.

The business landscape, the competition and potential opportunities are some of the notable issues with which activist shareholders will be concerned. Primarily, shareholders will be looking for how the board's composition aligns with the company's opportunities.

They'll be certain to question whether the board can move forward with the current skills and abilities on the present board. In light of this, boards need to be asking themselves where they have weaknesses and how they can fill the gaps. A gap analysis and board evaluations are good tools for boards to better understand what changes they need to make to better handle their expectations and responsibilities, even if it means removing poorly performing board directors. Boards need to write their own narratives so that their efforts aren't at risk of being misinterpreted by investors.

  1. Not Being Transparent About the Opportunities They're Pursuing

In addition to being more diligent about improving their performance, boards need to communicate with activist shareholders about their strategies to alleviate their concerns. Activist investors will have fewer questions when they understand issues such as why the board is pursuing certain opportunities and not others. Especially where the company seems to be taking a different direction than its competitors, activist investors are justified in asking how the board's approach either creates value or reduces risk. Boards need to be able to communicate clearly what the rationale is behind their decisions and be able to tie it back to their strategies. They can communicate this information through direct statements and proxy statements. Major investors like BlackRock want to see the board's framework for creating long-term value creation, including their goals and benchmarks.

  1. Failing to Establish Relationships Between the Board and Shareholders

Often, all it takes to ward off shareholder activism is for boards to be willing to open the door to discussions between top shareholders and representatives of the board. Shareholders are merely interested in better understanding how the company plans to use their funds, which is their right. As shareholders reach out to board directors and try to engage them in responsible discussions, boards are wise to start cultivating those relationships and be open to having discussions with a variety of different investors. Boards should also be prepared to answer questions on compensation and governance policies, in addition to other specific issues.

  1. Failing to Use Technology to Support Board Activities

Essentially, shareholders are looking for assurance that boards are giving their full attention to responsible board decision-making. One way to do that successfully is to demonstrate to shareholders how they use board management software solutions to increase efficiency and security within the board.

How Boards Can Prevent Shareholder Activism

Something that can really make a difference in talks with activist shareholders is divulging that the board uses Diligent Boards and the suite of software solutions that comprise Governance Cloud for managing board activities. The Board Assessment tool is a valuable complement to the Nom Gov, the succession planning tool that helps boards narrow down their top choices for board director and CEO vacancies. The tool allows boards to define their search by demographics, age, experience, region, sector, discipline and other demographics for over 125,000 potential candidates.

Succession planning committees can use the tool to gain insights into the board's current strengths and weaknesses by looking at individual directors and the whole board. In our business world that is constantly moving, shareholders want the assurance that boards have the right technology infrastructure in the boardroom to meet governance challenges head-on. That means fewer mistakes.

Diligent is a top innovator and the leader behind the concept of modern governance. Modern governance is the practice of empowering leaders with technology, insights and processes to fuel good governance that organizations require to thrive and endure in today's fast-paced world.
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Nicholas J. Price
Nicholas J. Price is a former Manager at Diligent. He has worked extensively in the governance space, particularly on the key governance technologies that can support leadership with the visibility, data and operating capabilities for more effective decision-making.