Article originally published in the Philadelphia Business Journal on April 16, 2015
The CEOs of many public companies raise their guard when they receive a phone call from an activist investor wanting to discuss how a company can improve its performance and shareholder return. This is not necessarily the right reaction.
Activists invest in underperforming companies and push for improved shareholder return through cost reduction, a change in business strategy, a leadership change or the pursuit of strategic options. If shareholder return cannot be improved through other means, the activist might push for outright sale of the company or one or more of its operating units.
If unsuccessful in convincing the CEO and board to implement their proposals to increase shareholder return, an activist may pursue one or more board seats, and threaten a proxy fight to seat their own director slate. All outside directors have a fiduciary duty to be independent, even if nominated by an activist and seated through a proxy fight. These directors need to make their own independent decisions based on what is best for the shareholders after board deliberation, not what is best for the activist who nominated them.
Some activists are interested only in making a quick return, with no interest in the potential of a company to generate much higher returns for its shareholders over the long term. This adds to the pressure of companies to sacrifice the long term in favor of shorter-term quarterly results. The interests of short-term oriented activists may not be in the best interests of most of the company’s shareholders. Other activists are in it for the long term as are many shareholders, and their proposals need to be heard and if valid, seriously considered.
Dealing with activists who are adversarial is a distraction to the CEO and to the board, and takes time and focus away from the business. A proxy fight impacts the CEO’s reputation as well as that of the board. So, how do you lessen the likelihood that your company becomes an activist target?