The new reality is that no public company, no matter how highly regarded or well managed, is immune from activist attention. The number of activist campaigns waged against public companies increased in 2015 to 375 according to the research firm FactSet.
Once an activist surfaces, every move a company makes can have a profound and cascading effect on its long-term viability. Therefore, it is essential to craft response plans before any sign of danger emerges.
Step One: Listen to Your Shareholders and Understand Their Concerns
The best way to determine which investors are unhappy—and might be willing to initiate or support an activist insurrection—is by engaging in regular dialogue. While consistent interaction with investors is essential to any good IR program, the most productive investor relationships hinge on listening. IROs who listen well can identify an investor’s concerns and determine how these issues should be addressed.
In addition, paying close attention to conversations with sell-side analysts can reveal subtle shifts in investor sentiment. To avoid tipping their hands, some investors convince sell-side analysts to pose their questions to senior management. If analysts are suddenly focusing on different issues, consider what investor concerns might be behind those inquiries.
Step Two: Understand the Triggers for Activists
Underperformance is typically the root of most activist involvement. Other dangers include poorly-communicated strategies, abundant cash, unsuccessful M&A, a dormant stock repurchase plan, and extremely generous compensation for executives or board members.
At the same time, having vulnerabilities is usually not as serious as failing to communicate the remedies for any problems at hand. Investor presentations are an excellent opportunity to outline challenges and discuss how they are being addressed.
Step Three: Assemble a Response Team
Activist threats can progress rapidly, so assemble a response team in advance. This team should consist of the IRO, top executives, a proxy solicitor, outside legal and IR communications counsel. Also, identify an articulate director who could serve as spokesperson for the entire board, presenting the directors’ perspective in the best possible light. It also is important that anyone speaking on behalf of the company understands the response strategy and undergoes communications training.
Step Four: Be Proactive about Good Governance
Gone are the days when meeting with portfolio managers was enough to maintain strong investor relationships. Today’s IROs have widened the communications circle to include institutional governance specialists and compliance staff, who will be critical decision-makers in a potential proxy fight.
Review the company’s annual proxy analysis and vote recommendations from proxy advisors such as ISS and Glass Lewis to identify governance risks, and reveal how the company is perceived relative to its peers. Management can then take appropriate actions to eliminate potential weaknesses.
Step Five: Be Communicative and Seek Common Ground
Some management teams believe that if activists call and the company ignores them, the threats will disappear -- when the opposite is actually true. By the time an activist calls a company, they already have done a tremendous amount of due diligence and are looking for management’s perspective. Ignoring them only raises their ire, confirms that the company has something to hide, and removes management’s ability to tell their side of the story.
When meeting with an activist, the management team should remain attentive and polite. Should the activist be contentious or insulting, it is important to stay calm. Activists are skilled at exploiting defensiveness. Listen, ask questions, and keep in mind that anything you say could be used against you.
Activists want to know that they are being heard and that management is executing on a concrete plan to mitigate any problems. As part of a well-executed response plan, meeting with an activist may be a golden opportunity to seek common ground and avoid an expensive and potentially damaging situation.
Maureen Wolff is president and partner at Sharon Merrill. She is a National Investor Relations Institute Fellow, Senior Roundtable Member and Honorary NIRI Boston Director. She is a trusted advisor to CEOs, CFOs and boards of directors on critical communications issues including corporate governance, shareholder activism and proxy contests, CEO succession planning and disclosure issues.
For more information on Sharon Merrill Associates, please contact us at info@InvestorRelations.com, or at 617-542-5300.