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Professional activist view of defense advisor playbook


For the defense advisor's video and chart for "Shareholder Activism Risk Assessment" referenced below, with links to the advisor's full presentation, see


Source: The Activist Investor Blog, April 7, 2015 posting


The Activist Investor Blog


Shareholder Activism: Are You Prepared? PwC Wants to Assess You.


Tuesday, 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 offering in shareholder engagement, the current fad in deflecting serious investor concerns.


Among other helpful items from PwC, including a full report and a video, the 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 portfolio companies.


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” with shareholders.


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 shareholders well.



Copyright 2008-2015 Michael R. Levin - all rights reserved.


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