An Ounce of Prevention Can Go a Long Way in Avoiding a Costly Proxy Fight
What makes a company a target for activist investors? What can companies do to be seen as a leader and not a laggard among their industry peers? Is superior financial performance always enough to keep activists away? If an activist has already asked for a meeting with your board, it might be too late to start asking such questions, but every director should understand how activists operate and what actions are needed if one comes calling. A comprehensive IR strategy must include the basic elements of shareholder activism defense. In evaluating your company’s IR program, keep the following tips in mind.
- Be Proactive with Your IR Communications
Waiting for an activist to emerge before engaging with your shareholders is a recipe for disaster. Your press releases, conference calls, and investor presentations should reinforce the pillars of your enterprise strategy. By providing regular updates about your company’s goals and milestone achievements, you can demonstrate transparency, build shareholder trust, and minimize your company’s IR vulnerabilities.
- Engage Proactively and Constructively
Ideally, you are already engaging with your top shareholders and reaching out to new investors during each earnings cycle. As part of that process, review the list of attendees after every earnings call or conference presentation to identify any activists who may be targeting you. Offering an introductory call might disarm an activist before a campaign takes root. Even if an activist is far along in their due diligence, constructive dialogue might prevent an escalation. In any case, the time to prepare is now by identifying a response team, which should include one or more members of the senior management team, plus a board director. Tactically speaking, your IRO should handle any initial call, but if you find yourself dealing with an aggressive activist, there will come a time for bringing out your heavy hitters. Each member of the response team should know the company’s strategy inside and out, have a solid grasp of IR fundamentals and corporate governance best practices, and be well briefed regarding the activist’s aims and history.
- Understand the Activist’s Motivations
Activists generally fall into two categories: those focused on environmental, social, and governance (ESG) issues, and those primarily interested in financial returns. Good corporate governance should address both areas but your response to any activist should be tailored to their specific arguments. For example, an activist who is critical of your sustainability efforts is unlikely to be moved by your success in, say, expanding margins. When boards and activists simply talk past each other without finding common ground, the risk of a drawn-out proxy fight increases.
- Don’t Underestimate Your Opposition
When an activist reaches out, a board’s first instinct might be to dig in with a bunker mentality. Today’s activist investors are often very well-prepared, reaching out to a target company only after they have conducted extensive research. If they have a history of activism in your industry, they may have some compelling ideas for creating long-term value. Of course, the board need not waste its time when presented with an unworkable proposal, but directors should be prepared to evaluate any shareholder submission with an open mind.
- Know When to Settle
An activist’s end game is not necessarily a proxy battle or hostile takeover. Many campaigns end in a settlement regarding an operational or strategic issue, sometimes with the activist gaining a board seat. Negotiating a settlement can be a way for the board to control the IR narrative and mitigate other risks. In a pitched battle with an activist, boards should be prepared to negotiate a settlement without losing sight of the company’s core values or long-term vision. At the same time, you should be taking the pulse of your largest shareholders to know where they stand. You can be sure that the activist has already done so, possibly even enlisting the support of one or more of them.
The Bottom Line
In today’s dynamic corporate landscape, preparing for shareholder activism is no longer optional, it’s essential. By proactively engaging with your shareholders, understanding the motivations of activists, and being ready to respond constructively, companies can protect their leadership and long-term vision. Now is the time to evaluate your IR strategy, strengthen your governance practices, and ensure your team is ready to handle any challenge that may arise. Don’t wait for a proxy fight to force your hand—take action today to safeguard your company’s future and maintain control of your narrative.
