Tue., Jan. 6, 2015
Mainstreaming of Shareholder Activism
October 2014, a full slate of nominees won shareholder support in its
proxy contest to replace the entire board of directors at Darden
Restaurants, best known as the owner of Olive Garden. The victory
followed a high profile campaign over the prior months led by
Starboard Value, an activist hedge fund that made national media
headlines, from CNBC to The Washington Post to Gawker Media.
Attacking management’s strategy and the board’s oversight, while
outlining a plan to increase earnings upwards of $300 million,
Starboard was able to secure the endorsement of proxy advisors
Institutional Shareholder Services (ISS) and Glass Lewis, and
ultimately the vote of a majority of shareholders to oust all 12
directors — an extraordinary and rare outcome.
replacement of Darden’s full board of directors is an extreme example
of what can go wrong when shareholder activism is left unchecked or
underestimated. But it is also an example of how much the face of
shareholder activism has changed and how companies and their
communications teams need to evolve in turn.
derided as corporate raiders, green mailers or simply hedge funds with
exclusively short-term interests, the perception of activist investors
among traditional institutions has started to change significantly —
activism has gone mainstream.
Shareholder activism has become an asset class unto itself, with
activist funds amassing more than $100 billion in combined assets
under management, up from $32 billion in 2008. According to McKinsey,
activists launched an average of 240 campaigns a year for the past
three years, compared to less than half that number a decade ago and
the number of occasions where activists have nominated a full slate of
board members has more than doubled in the past two years.
Historically, many of those campaigns called for one-time capital
allocation moves like a stock buy-back or special dividend, or the
sale of certain assets or the whole company. But now, activists are
becoming much more sophisticated and genuinely focused on broader
corporate strategy and practices they believe will make the company
more valuable. Activists are taking their message directly to
shareholders through extensive presentations or holding conference
calls. They are nominating more highly-qualified director candidates
and using sophisticated PR campaigns — including websites, videos,
social media and building relationships with the financial media — to
garner support for their campaigns and catalyze shareholders behind
their point of view.
result, traditional institutional investors are increasingly
sympathetic to and openly, or covertly, supporting activist
campaigns. Proxy firms — like ISS and Glass Lewis, who leant their
full support to Starboard in the Darden contest — have also been very
supportive of activist positions, siding with activists a majority of
this new environment of heightened and enhanced activism, no public
company, large or small, is safe from an activist investor’s scrutiny,
nor immune to the negative PR from a well-publicized campaign. As with
other areas of crisis management, effectively preparing for a
potential activist attack requires a thorough risk assessment,
contingency planning and a sound communications strategy.
communications professionals, we can’t wait for our clients to become
the target of shareholder activism before we act. Our job is to help
management see the businesses through the lens of an activist investor
and pinpoint vulnerabilities before an activist comes calling. In a
study of 500 of the latest 13-D filings, ICR identified ten
categorical similarities across the companies that were targets of
shareholder activism. In fact, after analyzing these categorical
similarities, it is possible to predict with a high degree of accuracy
a company’s future vulnerability to an activist. Some of the key areas
every public company should regularly analyze to gauge vulnerability
to activist investor engagement include:
•Stock price performance and shareholder returns compared to peer
•Financial and business performance
•Capital allocation and structural issues
•Executive pay and corporate governance
•Shareholder perception and engagement
•Media perception and commentary
Companies that proactively evaluate these and other key variables and
understand the potential campaigns that may result from areas of
weakness are better able to anticipate and respond to activist
Companies — and their communications teams — need to have a nuanced
understanding of who their shareholders are, how they feel about the
company and their history of activism in order to determine how and
when to communicate. Analyzing the shareholder’s perspective should
not be viewed as a one-off; a company’s shareholder base is constantly
evolving and needs to be monitored regularly. All companies should
conduct a thorough risk assessment and report to their Board on at
least an annual basis.
Effective activist defense is not about having a response plan, it is
about proactively assessing the vulnerabilities, understanding
shareholders’ views, taking actions to address any deficiencies, and
regularly communicating management’s vision and plan to maximize
shareholder value directly with shareholders and through the media.
a company does engage with an activist investor, the historical
inclination has been to immediately view the activist as hostile and
defend the company strategy. It used to be that activists could be
fended off by being labeled as short-term investors seeking to profit
at the expense of other shareholders, and most large institutional
investors bought in to that narrative.
Sometimes, of course, an activist investor will make demands that
clash with the Board and management’s vision for the company, but
these days a defensive and aggressive response is rarely, if ever, the
best approach, and can negatively affect other shareholders’
perception of the company.
Instead, each activist engagement must be treated on a case-by-case
basis, and companies need to consider proposals submitted carefully
and respectfully. Today’s shareholder — activist or not — is
empowered, and it’s important for the Board and management to
demonstrate an openness to constructive criticism and new ideas if
they will benefit the company in the long run. In some cases, that may
mean making changes or concessions to appease shareholders.
public fight with an activist investor should be the road of last
resort when it is clear that there is no room for compromise. When a
management team reaches the point of preparing for a proxy fight,
having established a prior dialogue with shareholders will prove
valuable. Companies that wait until their business is in turmoil to
engage shareholders will find themselves fighting an uphill battle.
Regularly articulating the company’s current and future strategic
vision to major shareholders is critical.
Rhetoric can also get extremely heated during a proxy fight, which is
why the board and management need to be able to anticipate what
questions will be raised, prepare messages accordingly and rapidly
coordinate and respond to new developments as necessary. When anything
you say can and will be used against you — and pulled out of context —
having a script and sticking to it is key. It is critical to involve
outside advisors with first-hand experience working in and with the
Finally, since activist investors will be rallying proxy firms and
institutions to their side, companies need to leverage the support of
third-party advocates to even the playing field.
mainstreaming of activism is fundamentally changing the way companies
communicate with shareholders. The old paradigm of disputing and
contesting all claims at whatever cost has been displaced in favor of
an engagement approach and real dialogue. However, companies need to
protect themselves through regular self-assessment of their
vulnerabilities and be prepared to communicate their strategic
initiatives in order to come out on top of an activist engagement.
* * *
Michael Fox is Managing Partner at ICR, and also co-heads ICR’s crisis
and transaction group.
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