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A Curious Tale from the Annals of Shareholder Activism

By Maureen Wolff, President and Partner

Nothing has more power to change a boardroom’s dynamics than the election of dissident directors – especially when they arrive as a twosome. I had the honor of moderating a panel discussion on shareholder activism at the National Association of Corporate Directors New England Chapter breakfast event earlier this month, where seasoned board members talked about the lessons they’ve learned in battling high-profile proxy contests over the years.

One of the stories, told by a former board chairman, involved the legendary corporate raider Carl Icahn. A manufacturing glitch had resulted in a steep drop in his company’s share price. After repeated attempts, Icahn was finally successful in having two of his nominees elected to the board. This occurred not long after the principal of another activist institution had been elected as a director, and not long before the company received an unsolicited tender offer at a substantial premium to the then-current share price.

The former chairman painstakingly recreated the scenarios that unfolded over the next few months as the board considered the takeover offer. At first, he focused on the gulf in interests and motivations between the newly elected “directors” and long-time members of the board. Unlike the established directors, who had long been personally committed to the company’s vision, mission and business strategy, the dissidents’ only interest was in immediately monetizing the company’s value for shareholders, he said. Predictably, these conflicting goals led to tremendous stress and friction on the board.

This part of the panelist’s story reinforced some of the points I’ve mentioned in my previous blogs about shareholder activism:

  • It’s all about valuation. Unexpected setbacks can hit even the best-managed, fastest-growing companies, causing the stock price to fall. Without warning, they become vulnerable targets for dissident shareholders.
  • Activism is a bullet that can’t simply be dodged. Although stonewalling can feel like a practical option at first, the most effective way to respond to activists is to engage with them, openly and honestly.
  • Once a company has been targeted by activists, there are no permanent cures. Dissident shareholders don’t just fade into the woodwork; they keep coming back. The best that can be hoped for is a lengthy remission, and even a remission takes extraordinary amounts of hard work and patience to achieve.

The former chairman’s story took an unexpected turn, however, when he talked about the lesson he learned. This lesson brought to mind the often-quoted phrase of 19th century German philosopher Friedrich Nietzsche, who wrote: “Out of life’s school of war: What does not destroy me makes me stronger.”

Yes, the day-to-day pain of dealing with three dissidents as board members verged on being destructive. But, in retrospect, these individuals brought outside perspectives that were crucial in enabling the board to maximize the value obtained for shareholders as a result of the company’s sale. They were not only able to draw upon personal experience accumulated in years of hands-on M&A experience, but also bring analytical resources to bear that otherwise would not have been available to the board. In addition, their presence during meetings sparked a level of informed debate that may not otherwise have materialized.

Knowing this company’s history I would not have expected it, but the former chairman concluded his remarks by emphasizing that activism has its positive attributes. Paralleling the words of Nietzsche, instead of destroying this particular board of directors, the arrival of dissidents enabled it to bargain more effectively in the best interests of the company’s shareholders.

In an environment of growing shareholder activism – in which, for myriad good reasons, the typical outcome is a proxy contest – this panel discussion provided ample food for thought.

Maureen Wolff is president and partner at Sharon Merrill. Maureen leads the implementation of the firm’s strategic vision and provides high-level strategic counsel to clients. She is a past chairman and board member of the National Investor Relations Institute (NIRI) and a current member of NIRI’s Senior IR Roundtable. She also is a past president and honorary director of NIRI’s Boston Chapter.

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