Over the next several weeks, LEVICK Daily will share selected interviews from our recent NACD Directorship article entitled “What’s Next? The Top Issues of 2013 and Beyond.” Today, we feature a discussion on activist investors with Marc Weingarten, a Partner in the New York office of Schulte Roth & Zabel LLP.
Mr. Weingarten is chair of the Business Transactions Group and a member of the Investment Management Group. His practice focuses on mergers & acquisitions, leveraged buyouts, corporate governance, securities law, and investment partnerships.
At the conclusion of the interview, you can find LEVICK’s own communications best practices appended.
Who are the activists and what do they want?
Marc Weingarten: There are two worlds of activists operating in the corporate sector. The first are issue activists – mostly pension funds, academics, and other special interest groups. The pension funds and academics generally are interested in corporate governance issues, such as say-on-pay, proxy access, de-staggering boards, shareholder rights to call special meetings, and redeeming poison pills. The special interest groups tend to focus more on social responsibility issues, such as board diversity and socially responsible investment.
The more intimidating side of the coin is financial activism – generally carried out by hedge funds and others that push companies to “maximize” shareholder value. Their actions typically are targeted at the balance sheet, and look to stock buybacks or dividends, sale of the company, spin-off or sale of lines of business, and leveraged recaps. Fewer financial activists, but some of the largest, focus more on the income statement side, looking to improve operations, increase revenue, and reduce expenses. This sometimes includes pressing for board representation via a proxy fight.
What are the reasons behind increased incidents of shareholder activism?
Marc Weingarten: The principal reason is the increased willingness of major shareholders, both institutional investors and pension funds, to support activists. Historically, they simply “voted with their feet” and sold out. But they’ve become so big that now they really own the market, and rather than selling and having to look to reinvest somewhere else, they join the activists in pressing for improvements.
When markets are down, investors are unhappy and will turn to activists for help. Several of the most successful financial activists now have several billion dollars in assets, and can target even the largest-cap companies. Given activists’ success rate in recent years, many more hedge funds that are not typically “activist” are now trying out the strategy on their poor-performing positions.
What are some of the most common mistakes that boards of directors make when faced with pressure from activist investors? How can companies avoid becoming targets in the first place?
Marc Weingarten: The most common mistake is for a board to refuse to give the activist a hearing. It’s fine to evaluate your defenses, but stiff-arming or fighting the activist from the start and refusing to engage is generally not well-received by the other stockholders.
Another common mistake is to attack the activist as merely a short-term opportunist looking for a quick pop in the stock price at the expense of long-term value creation. Shareholders will be happy to take any gains they can get, even if short-term. As such, a company under attack needs to put itself in the mindset of its shareholders and come up with responses that explain prior performance and realistically support a more promising future.
To avoid becoming targets in the first place, boards should regularly evaluate their strategic alternatives. No idea that a financial activist proposes should come as a surprise. The board should already have considered and rejected it, and be fully prepared to justify the decision. It should also have a strategic plan that has been thoughtfully vetted and challenged; not just perfunctorily accepted as dictated by management.
BEST COMMUNICATIONS PRACTICES:
1. In the age of transparency, boards need to direct their Investor Relations and communications team to focus on more than just the analysts. The democratization of the market is underway, investors are newly empowered, and companies need to think differently about how they engage potential activist threats.
2. Don’t let the shuttering of MoxyVote fool you; the activists are online and they use the Web to drum up support. Boards need to direct their teams to better understand how WikiInvest, Seeking Alpha, and other social and digital media have an impact on their value.
3.Companies that clearly and consistently articulate their value force activists to swim upstream against the dominant perception. There is no peacetime. Boards need to know what is being said about them beyond just their marketplace and ensure that companies communicate value aggressively, whether activists are currently looming or not.
This post is excerpted from Richard Levick’s recent NACD Directorship feature “What’s Next? The Top Issues of 2013 and Beyond.” To read the full article and learn more about the most significant issues impacting boardrooms today, click here.