The Activist Investor Blog
Shareholder Activism: Are You Prepared?
PwC Wants to Assess You.
April 7, 2015
Surely you’ve seen the new Pricewaterhouse Coopers (PwC)
report on activist investors?
The one that asserts “shareholder activism is exploding” and advises
companies to “prepare and respond”? It attracted some
news coverage and
investor analysis as the latest
shareholder engagement, the
current fad in deflecting serious investor concerns.
Among other helpful items from PwC, including a full report and a video,
risk assessment tool piques our
interest. It reminds us of our time in big management consulting firms,
where we pushed quizzes and questionnaires that aimed to frighten clients
about how poorly they ran their businesses. It’s a standard, if naive,
tactic to scare up work.
BoDs and CEOs can thus assess the risk of attracting various types of
activist investors. The firm invites executives to “Check all of the
factors that may apply, and see where you stand.” PwC just wants to
scare the crap out of executives, as they worry about attracting attention
from a slick hedge fund. We studied the tool a bit, and ran some scenarios
through it, to see how well it reflects how real activists think about
The tool divides activist projects into four types: hedge funds, “vote no”
campaigns, shareholder proposals, and adverse say-on-pay votes. Of course,
only hedge fund activists pose a serious threat to a company.
It also lists three factors that drive the likelihood of an activist
project: financial factors, governance profile, and investor base. The
investor base factor merely asks whether a company has activist investors
among the largest shareholders, which assumes what a CEO uses the tool to
find out. Setting this factor aside allows us to ponder the financial and
corp gov factors.
The financial factors include low shareholder return performance, low
market-to-book ratio, and high cash balances. To PwC, any of these
represent the “greatest risk” of hedge fund activism. And, investors do
indeed focus on these factors in deciding whether to pursue an activist
project at a company.
In contrast, only two of the nine corp gov factors represent the “greatest
risk” from hedge funds - a “stale” BoD or no engagement program, whatever
these mean. One of the factors, a classified board, carries a “low” risk,
even though prominent hedge fund activists have
gone after companies with one. And,
poison pills are conspicuously missing.
Poor showing on the nine corp gov factors generally increases the risk of
a shareholder proposal, say from a pension fund or foundation. While a
nuisance, shareholder proposals really don’t worry most executives,
despite what PwC thinks.
This is all completely subjective. The difference among low, moderate,
high, and greatest risk, across 16 factors, has no basis in anything other
than what PwC consultants say. They cite no data or analysis underlying
what makes one factor more important than another. We can find no
algorithm or model behind any of this nonsense.
More to the point, what to do about a high-risk situation? Fix the
disappointing financial performance? Rectify poor corp gov? Nah, just
“consider the activist’s ideas,” seek “consensus”, and “actively engage”
We can’t imagine directors actually complete this inane exercise. If so,
let them use the tool, assess the risk, retain PwC to defend against us
investors, and delude themselves that doing so represents serving
2008-2015 Michael R. Levin - all rights reserved.