While management should lead shareholder activism preparation and response activities, the board has a critical role to play in both. Boards, and individual directors, should view their responsibilities with respect to shareholder activism the same way they view their role in overseeing management’s development and execution of the company’s strategy.
Boards should consider the following steps:
Understand shareholder activism developments
Leading boards are incorporating a discussion on shareholder activism into at least one of the board’s quarterly meetings. Inviting an outside advisor to speak about recent developments in shareholder activism, activist activity in the company’s sector, and the changing attitudes of institutional shareholders can also provide significant value.
Oversee the identification of activism risks
The board should confirm that the management team is working to identify potential vectors of attack from an activist’s perspective. These vectors can be related to strategy, operational performance, valuation, capital structure and allocation, shareholder engagement, corporate governance or ESG. Engaging advisors experienced in defending clients against shareholder activists for this process is important as management may unintentionally fail to identify or take seriously potential vectors of attack that seem implausible to them based on what they know about the business. These arguments, however, can be some of the most powerful from an activist’s perspective.
Address the risks
Once the factors that drive potential risk for shareholder activism are identified, the management team and the board should decide what actions, if any, should be taken to mitigate those risks. The board should make sure that management takes timely, appropriate action, particularly relating to changes that are easy to implement, are already being contemplated or present the highest risk of drawing activist attention.
The board should separately discuss with the company’s outside advisors evolving investor expectations and potential proactive steps that can be taken with respect to environmental, social and governance matters to bring the company in line with leading practice and demonstrate responsiveness to shareholder perspectives. Many corporate governance provisions that were once commonplace, such as combined chair/CEO roles or classified boards, have become hot-button issues for institutional shareholders and may provide a lever for an activist’s campaign.
Consider direct engagement with key shareholders
Some shareholders seek a direct dialogue with board members to communicate their views and to better understand the board’s perspective and how it is executing oversight. Offering to make a director available to key shareholders can demonstrate the board’s commitment to direct engagement and build trust, even if only a handful of shareholders may actually accept that offer. In the event of an actual activist campaign, board engagement with shareholders becomes more critical and has become a standard component of an activist campaign defense. In a live defense it is most powerful if shareholders have been offered a meeting with a director in the past.
Oversee a response plan
When an activist first emerges, it is critical that the company has a well-developed response plan and strategy to quickly engage and evaluate the activist’s claims. A response plan is not intended to guide the entirety of an activist campaign defense, but it can provide structure in the rapidly evolving environment that follows the first outreach by an activist.
This tactical plan should include details about the defense team, management and external advisors. It should outline the process for activating the defense team as well as escalation guidelines depending on the details of the situation. The plan should also reiterate roles and responsibilities of each advisor group, key members of management and the board. It should have rules of engagement establishing who will be the primary point of contact with the activist and the process for redirecting any outreach to any other member of management or the board back to that primary point of contact.
Drafting potential public responses that can be quickly adapted based on the specific details of the situation can be invaluable when managing inbound inquiries from the media or shareholders. These efforts strengthen the company’s ability to control its own narrative and not cede the trajectory of future shareholder engagement entirely to the activist.
Conduct a simulation
As part of developing an activist response plan, the board should also consider, together with management, stress testing the response plan using a simulation. These exercises have become increasingly common for companies at the forefront of activism preparedness. In a simulation, the company’s key outside defense advisors will lead senior management and select members of the board through multiple escalating scenarios that are typical of an actual activist campaign, asking the management team and board to outline how they would respond to each scenario and then discussing the proposed response strategy with the broader advisor team leading the simulation.
The scenarios typically escalate from initial unsubstantiated rumors all the way through the nomination of a dissident slate of directors and the initiation of a proxy fight. The company’s advisors can provide valuable insights into how a seemingly sensible response to an early scenario can become a problem as an activist campaign escalates, and the structure of the exercise can highlight areas where alignment between management and the board needs to be strengthened.
Planning for a better outcome
Shareholder activism is a challenge for which every publicly listed company must prepare. For boards, shareholder activism can also have direct implications for individual directors. The ultimate weapon in an activist’s arsenal is a proxy contest to replace directors, which can be damaging for individual directors with respect to the target company as well as from a wider reputational perspective.
Boards must be proactive in helping their companies prepare for potential activist activity. Vulnerabilities are not always obvious and should be examined through the lens of an activist and the company’s shareholders. Focusing too narrowly on what seems most plausible or likely may lead the company to miss potential angles of attack that resonate with shareholders. Boards must be prepared to take a more active role in engaging with shareholders on a regular basis, not only when the company is under attack. Focused attention on shareholder activism preparedness cannot fully inoculate a company from the risk of an activist approach, but it can position the company and its board for a better outcome.
Questions for the board to consider
- How is the company performing relative to its peers and the broader market?
- What has the shareholder experience (TSR) been over the last one, three and five years?
- Is the board getting an unfiltered view of shareholder feedback on the company’s strategy and performance?
- How is the board thinking like an activist in considering and proactively addressing the company’s vulnerabilities?
- Does the company know who its key outside advisors are with respect to activism?
- Have advisors performed an outside-in vulnerability analysis? Has the board seen and discussed that analysis?
- Does the company have a plan in place in the event an activist takes an interest in the company? Are the rules of the road clear?
- Does the board understand its role in responding to an activist campaign and has it participated in simulation exercises?
- Has the board evaluated actions aimed at decreasing the company’s vulnerability to activism? Did that include potential strategic, operational, capital structure and corporate governance/ESG considerations?
- Does the board (select individual directors) have direct dialogue with shareholders? Do shareholders feel they are able to express their views directly to the board?