If it seems like activist investors have had a more visible and powerful presence over the last few years, it’s because they have.
In fact, according to the results of the Q1 2015 CFO Signals™ survey, just under three-quarters of public company CFOs in the United States say they have experienced some form of shareholder activism – most often in the form of communication with management or the board, and sometimes in the form of proposals that have gone directly to shareholders.
One of the keys to being prepared for activists is to understand what they’re doing and why
Moreover, about half say they have made at least one major business change specifically because of shareholder activism (share repurchases, leadership changes, and divestures being the most common).
The trend also shows no signs of abating. In the wake of the financial crisis, Dodd-Frank, and Say-on-Pay votes, shareholders have become more assertive in expressing what they want from the companies they invest in.
For CFOs, this new dynamic between public companies and shareholders presents an evolution in corporate governance that may need to be addressed.
There are several steps that CFOs can take to prepare their companies to manage increasingly vocal and influential investors. In this article, we will discuss:
- how finance chiefs can identify and address company financial issues that could attract activist attention
- why a more proactive engagement with the investment community is needed long before an activist campaign begins
- what some of the key components of a playbook are for responding to an activist campaign
Trends in activism
One of the keys to being prepared for activists is to understand what they’re doing and why. To a large extent, activism is a debate about capital deployment, risk tolerance, and performance – topics that are typically part of management’s and the board’s agenda in the normal course of business.
If your company has issues in these areas, you probably want to be in control of the situation and prepared to respond to activists.
Being prepared also means understanding some of the trends shaping today’s shareholder-activist campaigns. For example:
Some activists have a longer-term investment horizon than their reputation suggests. A study of 2,000 activist campaigns over the last 10 years by Columbia Business School Professor Wei Jiang found that activists’ average holding period is just over two years.
Activist campaigns are often “friendly.” The majority of such campaigns studied by Professor Jiang occurred without getting into the press. Typically, a shareholder approached a company with a point of view on either how capital should be deployed or opportunities to enhance value, and there was a conversation between company management and the investor.
Activist campaigns vary in objectives and tactics. Certain activists discreetly put forth proposals focused on incremental value creation through constructive interaction with company management. Others mount more aggressive, public campaigns aimed at proxy contests or other tactics to force major company transformations or change the composition of the board or management.
Different industries have attracted varying amounts of attention from activists, although no industry appears immune. Even when national security or regulatory interests come into play, activists have made their mark across a broad range of industries and will likely continue to do so.
Factors that tend to attract activist attention are strong cash flow, low dividend payout ratios, conservative balance sheets, recent underperformance, capital- intensive businesses with assets ripe for selling or spinning off, and industries facing shifting market forces and business models.
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