Being proactive can help mitigate stress
By Lisa Blais and Al Prieto
A large advertising firm was approached by an activist about merging with another, smaller firm citing consolidation trends in the industry as a driver for the strategy.
Unbeknownst to the activist, the ad firm had already considered the combination internally, having predicted an activist proposal about a merger might come along.
The company’s management took the initiative to explore the possibility of an acquisition; an important step to help mitigate activist fallout.
This proxy season, instead of looking for ways to repel an activist proposal, consider a counterintuitive tactic: embrace the activist mindset.
While there were fewer activist proposals overall in 2018, says law firm Gibson Dunn in its client letter on shareholder proposal developments, the average support for proposals voted on increased by almost 4 percentage points to 32.7%. The take away: Investors are attuned to activist themes, and, increasingly, they like what they hear.
Activist proposals have long been viewed as something to resist, even fear, but a new strain of thinking has become part of the debate. Boards are now looking at activist themes to inspire their own actions – as both an offense and defense strategy.
Embracing activist thinking is no longer considered taboo, confirms a report from the Harvard Law School Forum on Corporate Governance and Financial Regulation. Indeed, doing so may be an important strategic move because it shows potential activist that “the spectrum of governance hot buttons is being addressed by the company in a thoughtful manner. Taking up this challenge is the best preparation for and defense against activism.”
In the case of the large ad firm, the board was able to answer “no” to the merger. So when the activist proposed it, the prominent firm could confidently reply, “Go ahead and call them if you like. We’ve already explored this and we know they’re not interested.” By proactively exploring the merger themselves, the stress and conflict of dealing with an activist proposal was avoided.
To derail activist conflict, consider several key steps.
First, take an activist’s view of the value screen. Is the company doing everything it can to extract value for shareholders without diluting the business? Are there other avenues the company should consider? This may require asking questions that challenge the stated plan of the CEO and ultimately the new avenue may be rejected. Still, by asking the questions and exploring the issue, the Board may have the confidence to face off against an activist proposal.
Additionally, be proactive in evaluating risk. Ask yourself the hard questions regarding risk before an activist asks them for you. We are working with one CPG company that is stable and successful, but they are completely reliant on two key natural resources for their products. That’s a risk they need to face or likely an activist proposal will challenge that for them and in a public and expensive way. Evaluating risk within a board can be particularly challenging in these transformative times. Often Boards today may have a mix of directors – some from traditional companies who are risk averse and others from digital backgrounds who are used to risking it all and going for broke. These potential disagreements around risk tolerance must be worked out within the confines of the Board or an activist may be able to exploit them from the outside.
Finally, have an agreed-upon activist engagement strategy. The board must have a process for engaging with activists in a constructive way. It’s important to have this as a Board-wide communications process – everyone on the Board needs to be singing from the same hymnal.
Be sure your engagement strategy addresses the key activist trigger points:
• Is there a potential value gap?
• Can the activist get votes?
• Is our board composition aligned with corporate strategy and stakeholder expectations?
In doing so, this may reduce the chance that the company becomes a target. We had one director tell us that an activist party was convinced to handle an issue without a proxy battle. “We got them to listen because it wasn’t the first time they’d ever heard from us,” he said.
One element of an engagement strategy should be ready for use after an activist shows interest – that is a counter proposal. An activist’s advances do not always merit a full out fight. Engage and listen to their concerns and consider the possibility that sometimes, the activist can be wrong or only partially right. In this case, a well thought out counter proposal may balance what’s best for shareholders and stakeholders alike.
The truth is, activists may be offering more valuable ideas than some detractors suggest, said Larry Fink, Chairman and CEO of BlackRock, in his annual letter to shareholders this year. They are demanding companies exercise leadership on a broader range of issues than boards in the past may have faced, he said. “And they are right to: a company’s ability to manage environmental social and governance matters demonstrates the leadership and good governance that is so essential to sustainable growth, which is why we are increasingly integrating these issues into our investment process.”
But there’s no need to wait for a costly proxy challenge to face these topics. Instead, internalize the key themes of the activist platform. Think like an activist and head that challenge off before it happens. In this way, boards can give investors what they seek without sacrificing the ability to guide the company forward, avoiding turmoil. In a world tossed by transformation and disruption, this is an opportunity for boards to embrace change-thinking while maintaining a steady hand on the wheel.
Lisa Blais is Egon Zehnder’s managing partner of the Boston office, co-leader of the US Board Practice, leader of the North American Industrial Practice, and co-founder the US Diversity Council—where she focuses on the industrial and private equity sectors, helping with C-suite executive search work.
Al Prieto leads Egon Zehnder’s New York office, co-leads the firm’s U.S. Board Consulting Practice, and works in the firm’s global Health Practice; he is an advisor on matters surrounding best-in-class corporate governance through board composition, board search and succession planning, board assessments, and CEO succession planning.