The best way to avoid being targeted by shareholder activism is quite simply for company directors to be their own activists, according to investment firms.
Companies can pre-empt their arrival by following corporate governance best practices, such as regularly refreshing the board of directors with a focus on skills, according to panellists at The Deal’s 2019 Corporate Governance Europe conference in London last week.
But while the kneejerk reaction of a management team might be to resist activists, there are a number of benefits to being targeted.
“Activism is governed by the clear motivation of wanting to make money, and I can’t think of many human interactions that are much clearer than that,” said Thomas Davies, senior partner at consultancy firm Kekst CNC.
“Bear in mind that once an activist shows up, they are not a pariah – they are a representative of the shareholder base,” added Davies. “It’s highly unlikely that they are not talking to other shareholders, and would probably rather avoid a proxy fight just as much as you.”
“Activists are paid to deep-dive into the companies they invest in, unlike other investors who might have hundreds of companies in their portfolio,” said Cas Sydorowitz, global head of activism and M&A at proxy solicitation firm Georgeson.
Given the often-public nature of the business, the activist firms’ reputation is on the line too – so they are likely to have a high degree of certainty that there is a path to success, added Sydorowitz.
“In some meetings it’s clear that the board members actually know less than the activist,” he said.
Companies should be incredibly proactive, conducting their own vulnerability analysis on a regular basis, engaging with shareholders and ensuring high standards of corporate governance.
“When I hear a management team say it has its activism defence manual on a shelf ready to go, know it’s in trouble because it should be on the desk,” said Richard Thomas, head of European shareholder advisory at Lazard. “Don’t wait for their call – get ahead of them.”
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- The best way to prevent being targeted by shareholder activism is quite simply for company directors to be their own activists;
- Given the often-public nature of the business, the activist firms’ reputation is on the line too – so they are likely to have a high degree of certainty that there is a path to success;
- Companies should be proactive and recognise that there are positives to being targeted;
- The activism landscape is different in Europe with more action taking place behind closed doors – but that is changing.
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Firms should also consider investing more heavily in investor relations (IR). “If you’re trading at a 40% discount because your message is misunderstood, think about IR – it’s not an administrative function but a way to create real value if done well,” said Thomas.
With the news late last week that eBay has agreed to a strategic review of its business following pressure from activist investors, it’s especially relevant.
Shareholder activism has been slower to take off in Europe than the US, where it’s far more mainstream. Potentially there are a number of reasons for this, but M&G Investments’ head of corporate finance and stewardship Rupert Krefting thinks it’s down to a fundamental difference in the way that business is done.
"In some meetings it's clear the board members actually know less than the activist"
“As active fund managers we are engaging with the companies we invest in, but just not making a lot of noise,” he said. “It’s more private and discreet, and if we don’t get what we want then we will use our vote. Failing that, we’ll then go to the press.”
M&G had considerable success with the public approach in 2017 when it wrote an open letter to Canadian infrastructure firm Gibson Energy. It said it was disappointed by the pace of progress after applying considerable pressure on management over a two-year period, and called for a strategic review.
“We wouldn’t take that approach unless we had to, but we also recognise that we can use the press to our advantage,” added M&G’s Krefting.
The typical European shareholder activist is generally more patient and private than its US counterpart – but sources believe the axis is slowly shifting.
“We do still hear the stigma of the short-term, opportunistic activist, but I don’t think that resonates with the vast majority out there today,” said Lazard’s Thomas.
The most common issue activists come across in Europe is board independence. “Board member tenure is less of a problem than it can be in the US, but over-boarding is a bit of an issue – there’s a lot of crossover between companies,” he added.
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