Best Practices for Shareholder Activism

Nicholas J Price
In past years, activists had a reputation for being corporate raiders. Times are changing, and with the changes have come a greater acceptance of activism by the institutional investment community. That's how David Hunker, leader of Shareholder Activism Defense for J.P. Morgan, describes the current climate surrounding shareholder activism. In J.P. Morgan's 2017 report on Best Practices in Investor Relations: The Evolution of Shareholder Activism, Hunker states that activists are more accurately describing themselves as defenders of shareholder value since the days of the 2008 financial crisis. Hunker also explains that the lines between true activism and investor interests are becoming blurred.

To fully comprehend best practices for shareholder activism, it's important to look at activism trends, focuses and targets that hold the keys to developing best practices for addressing activism and deciding when or if to implement changes based on shareholder input.

Trends in Shareholder Activism

As the perspective on activism begins to evolve, the trends around shareholder activism are beginning to evolve with it. Current trends in shareholder activism are showing growth in activists, changes in activist targets, changes in the role of proxy advisors, and an openness in communications between boards and shareholders.

Global institutional investors are increasing. Activism has been a common occurrence in this arena. The growth in activism is creating a greater overall acceptance of it, which will likely lead to increased activism on a regional level.

Activists are more likely to target mega-cap companies rather than small or mid-cap companies, as they have in the past. Activists are finding that they need to target bigger corporations to effectively put their capital to work. Large institutional investors are more inclined to go after large companies, which opens the door for other activists to pursue companies with smaller stakes. The result is that the overall number of activists is increasing.

Another important trend is that proxy advisors are becoming less influential than they've been in the past. This is largely due to the fact that large companies are often forming their own internal corporate governance committees. These committees make independent voting decisions for their funds based on a set of internally developed guidelines. The committee approach gives companies the opportunity to incorporate situation-specific information in decision-making, which helps them to customize their approaches to the market and to justify their decisions if activists bring questions forward.

Activism is obviously a growing trend. Companies are realizing that they have no choice but to have a willingness to be open to discussions with shareholder activists. In light of this, companies are increasingly open to communicating with institutional investors. Investors may choose to decline such invitations. Nonetheless, investors are likely to be more trusting, and they always appreciate the effort.

Understand Current Activist Focus and How They Identify Targets

The report by J.P. Morgan suggests that activists may choose from a large array of issues when making inquiries of boards and managers. The most common issues activists focus on include the following:

  • Companies where shareholders perceive that they have reduced value
  • Taking a big-picture view as a strategy in the value in breaking up the company
  • Making changes in capital allocation
  • Seeking clarity on corporate structure
  • Making recommendations for adjustments to corporate strategy
  • Requesting governance changes

Activists are looking for weaknesses and red flags that help them identify targets for activist issues. The J.P. Morgan report lists weaknesses that help them identify targets, such as:

  • Stock price in relation to peers
  • How they structure capital
  • Distribution policies
  • Governance principles
  • Corporate structure
  • Track record for mergers and acquisitions
  • Business strategy

Best Practices for Activism

The key to addressing shareholder activism responsibly is for companies to acknowledge that activism is alive and well and be open to engaging with shareholders to better understand and resolve issues.

It's a mistake for board directors to listen only to large activists. Shareholders with a relatively small ownership stake may have relevant and important points to make. Boards must be willing to give smaller investors a fair share of their time and be willing to engage with them to understand their perspectives. Boards must also be willing to provide access to senior managers or individual board directors if it's appropriate or necessary.

After listening to shareholder concerns, boards must be as objective as possible in assessing the virtue of suggestions. Boards must also consider the influence of proxy advisor suggestions and how shareholders are likely to vote on issues. In the event that boards are willing to make changes, they need to examine the potential benefits and negatives of potential settlements or concessions.

One of the best defenses that boards can have in addressing shareholder activism is to stay current on activist trends and strategies. This will assist boards in contesting actions if it appears that it's in the best interests of shareholders. Staying on top of trends may also help boards determine if a public relations strategy may help them to weather the times. Overall, board directors need to communicate a consistent message from directors and managers in their interactions with investors.

Boards can give themselves a head start on activism by making activism defense a regular part of the communications between board members and executives. Advance communication will give boards the necessary time to consider whether implementing changes are consistent with their strategy and whether they will create long-term shareholder value.

Digital Governance Tools Support Best Practices for Good Corporate Governance

Boards can't afford to ignore the increase in shareholder activism. A board portal provides the necessary security for board communications so that board directors can discuss their approach to shareholder activism with complete confidentiality. Board portals retain important reports and documents that support the board's decision making. Board directors can use the board portal to open up secure communications between shareholders and the board to help inspire mutual trust before issues turn into contentious matters. In today's financial climate, even a few activists can make a big difference. By boards and activists working collaboratively together, the prospects for corporate long-term growth are good.
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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.