By Devin Sullivan, Senior Vice President, The Equity Group
Andy Grove, former CEO of Intel Corporation, famously said, “Success breeds complacency. Complacency breeds failure. Only the paranoid survive.”
When Mr. Grove said those enduring words 25 years ago, he was focused primarily on business strategy and operations. Today’s public company executives must cope with the added issue of shareholder activism. CEOs are learning that no company – from the micro-est of microcaps to Microsoft, itself – is immune to the advances of activist investors.
Whatever your opinion, activism is here to stay. The practice has evolved into an asset class, with an estimated $200 billion AUM and growing. Fresh money is pouring into these funds each year, serving as kindling to ignite proxy campaigns with one directive: enhance shareholder value.
This burgeoning marketplace draws practitioners of varying intentions and degrees of skill. Some activists really do fight for much-needed change that will benefit all shareholders, while others are driven by self-interest, the lure of a short-term gain, and generating headlines. Whatever the motivation, this is no passing fad.
Moreover, there is no regard to size. According to Activist Insight, over 400 companies were targeted by activists in 2014, 282 of which were nano- through small-cap securities. Many of these contests were supported, even birthed, by traditional funds that had grown frustrated with the lagging performance and executive intransigence of their investments. As important, the perception of these activist investors has undergone a stunning turnaround, from shadowy figures driven by self-interest and bathed in the ink of a poison pen, to champions of both large institutions and small investors.
So how should today’s CEOs prepare for this new reality? Take Mr. Grove’s advice and develop a healthy paranoia. If no company is immune, then assume that yours is the next to be targeted. A series of simple steps can help you prepare for, and perhaps avoid, that next 13 D filing.
1. Give Yourself a Check-Up – activists tend to focus on issues surrounding corporate governance (oftentimes not enough independent members or too chummy of a Board), under-performing businesses, high compensation relative to industry / performance, or a weak balance sheet and capital structure. If you are vulnerable in any of these areas, then…
2. Be Your Own Activist – a leaky pipe is just an annoyance until it bursts and floods your kitchen. The same principle applies here. A recent article in The Wall Street Journal described the phenomenon of internal activism whereby Boards and executives take actions to try to get ahead of potential shareholder demands at their own pace and on their own terms.
3. Listen – “Listening tours” have become a popular way to stay ahead of investor concerns. Some companies hire outside firms to conduct regular perception studies to gather unfiltered commentary about their company and emerging concerns.
4. Stay Engaged with your Investors – don’t confine your conversations with large shareholders to quarterly conference calls. Stay engaged and make sure that they understand what you are doing and why you are doing it. Establish mile markers you want investors to identify along the way and be sure to update them on your progress.
Shareholder activism is playing an increasingly important role in today’s capital markets. For public companies, preparation is key. C-suite, Board members, and IR practitioners should undertake top-to-bottom review of their operations, capital structure and governance, address potential areas of weakness, and commit to frequent and substantive investor communications.