Confessions, and advice, from a director who was once an activist.
Nelson Peltz. Third Point. Cevian Capital.
If you haven’t heard of any of these, it may mean that you do not own shares of Proctor & Gamble, Nestle or Ericsson, respectively. Because those three names — a billionaire and two hedge funds — took on those corporations in the demolition derby that is modern shareholder activism.
Once dismissed as mere disgruntled loudmouths, shareholder activists have long been portrayed as modern-day pirates, forcing loyal board members and management to walk the plank while they plunder vulnerable companies. They were rogues taking treasures that didn’t belong to them. But today’s activist investors want something different — something that may actually benefit companies.
I’ve seen this firsthand with one very public event involving ConAgra Foods Inc.
In 2015, I teamed up with Jana Partners, which specializes in event-driven investing. They approached me about an opportunity that captured my attention. Two years prior, ConAgra had completed its acquisition of Ralcorp Holdings Inc., a leading supplier of private-label packaged food in North America.
Over the 19 months after the deal closed, ConAgra shares slipped 0.3%, while every other food-products company in the S&P 500 advanced at least 10%, according to data compiled by Bloomberg. The Ralcorp purchase was clearly a misstep. Jana wanted to do something about it.
The investment firm and I discussed its thesis about what ConAgra had done wrong, what the board should do to redirect the company and the potential value of stock if they acted on the recommended strategy. If a proxy fight ensued, Jana asked if I would put myself up as a board member, along with two other candidates, including Jana managing partner Barry Rosenstein. I gave the proposition considerable thought, knowing that I might become persona non grata within conventional business circles. Ultimately, I found this new approach compelling because of the opportunity to create value for all shareholders who stayed with us — myself included. I agreed to run.
Our first step was to join forces and purchase enough outstanding shares to qualify for a 13D (a form required by the SEC when a person or group acquires beneficial ownership of more than 5% of a voting class of a company’s equity securities registered under Section 12 of the Securities Exchange Act of 1934). By the time we announced our status, the group owned 7% of the corporation’s shares, providing enough leverage to get a seat at the table.
Due to a peculiar set of circumstances, resolution was reached at lightning speed — within three weeks of our announcement. The company acknowledged that our proposals were sound and the CEO quickly and publicly revealed the intention to sell their private label business, a key element of our program.
Activist investors are constantly surveying the landscape to identify companies that are not employing optimal strategies. Because they don’t possess inside knowledge, management missteps must be observable externally — and be reflected in the price of stock. In addition, activists must have an alternative strategy that they believe will have a positive impact on the company’s financial performance.
That doesn’t mean they are always positive.
Sometimes activists focus on short-term financial performance and do not necessarily take the best long-term course of action to manage assets. Advocates for change may propose selling off pieces of a business or dropping research and development, which creates immediate improvement in share price, but diminishes long-term value. This is where leaders with outstanding communication skills can influence shareholders with persuasive arguments to marshal support for their position.
There are plenty of corporations with discrepancies between their current stock price and current financial earnings, yet shareholders believe a tremendous future lies ahead. Tesla is an example. CEO Elon Musk has done an impressive job articulating how his strategy will result in long-term value. Because his passion has effectively built a bridge between Tesla management’s intentions and shareholders’ minds, it would be difficult for an activist to make a case for a better short-term use of assets. That just wouldn’t happen. Time will tell whether today’s shareholders of Tesla are making a wise investment.
Savvy companies should take their cues from Musk and others like him. It’s up to the board and management to explain strategies that will impact future returns, along with expected results. When done effectively, shareholders become your advocates.
In addition to communicating long-term perspectives, companies can take other steps to avoid becoming activist targets. Begin thinking like them. Management and boards should constantly consider whether they are pursuing the right strategies.
Among the questions to ask:
- Are we making this decision because it’s always been done this way?
- Are we defaulting to the easy route?
- Is this action based on historical practices or whims?
- Have we considered a variety of options?
- Is there a different way to structure our balance sheet?
By taking a proactive stance and operating aggressively on behalf of shareholders, a board diminishes the chance of becoming a target of activists. However, if an activist approaches your company, the smart thing to do is to begin a dialogue to understand their proposal.
There are multiple ways to proceed. For example, you can:
- Give serious consideration to an activist’s recommendation, determine it has merit and implement their plan graciously.
- Consider changing course when an activist proposes something different from what you’re doing, but equally as good. It’s wise not to take pride of authorship. Make it your business to find common ground. Otherwise, be prepared for a fight (which will be a waste of shareholder resources) if you forge ahead without some compromise.
- Display confidence in your decision to “just say no” if you believe the corporation’s current strategy will yield superior results compared to an activist’s suggestion. Be prepared to state your reasons and be ready for a potential proxy fight that you may lose. Because in the end, you have to do what you think is right for the company, as do shareholders.
It’s natural to resist change. We all do it. A dynamic exists on many boards that makes it difficult to transform. This can present challenges when trying to evolve your approach to responsibilities—or if the time comes to welcome new members foisted on the group by an activist intercession.
If people are disdainful of the actions I took at ConAgra, they haven’t expressed it to my face. And, as evidence that times have changed, it led to my recent board assignment with European packaging company Smurfit-Kappa, which was seeking an American board member with M&A experience. They were aware of my role in the ConAgra intervention and valued that I could sniff out problems before a challenge occurred.
Jim Lawrence serves on the boards of Aercap Holdings, Smurfit Kappa Group, Avnet Inc., and International Consolidated Airlines Group and as a member of the Diversified Search Corporate Board Advisory Group. He’s been the chief executive officer of Rothschild North America and PepsiCo Asia, Middle East, Africa; chief financial officer of Unilever and General Mills; and executive vice president of Northwest Airlines in addition to other positions. Previously, Lawrence was a partner at Bain & Company and founded his own consulting firm, The LEK Partnership. Since 1990 he has served on the board of directors for 16 publicly traded companies.