Article originally published in the Philadelphia Business Journal on July 22, 2019
CEOs of many public companies raise their guard when they receive a phone call
from an activist investor wanting to discuss how their company can improve its
performance and shareholder return. This is not necessarily the right reaction. In
April 2015, I wrote an article on this subject. This is an update of that article.
Activists invest in underperforming companies and push for improved shareholder
return through cost reduction, a change in business strategy or leadership, 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
If unsuccessful in convincing the CEO and board to implement their proposals to
increase shareholder return, an activist may threaten a proxy fight to seat their own
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 concern for 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 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 the board
and takes time and focus away from the business. A proxy fight puts the CEO and
the board in the public spotlight. How do you lessen the likelihood that your
company becomes an activist target?
Think like an activist when formulating and executing strategy
Companies that outperform their peer group are usually not targets of activists,
because the potential for improvement is less when compared to companies that
underperform. Outperforming your peer group should be your objective regardless.
The board needs to hold the CEO (and themselves) to high-performance standards
Activists like to target under-performing companies that have a weak CEO and are
governed by a weak board. I have served as a director of three public companies.
When a new director joins our board, the last thing my fellow incumbent directors
and I want is to be viewed as not having held the CEO to high-performance
Ensure decisions are made based on what is best for the shareholders, not the CEO or board
What is in the best long-term interests for the shareholders should be the focus of
the CEO and the directors, not what is in their personal best interests. After an
evaluation of the alternate strategies to improve financial performance and
shareholder return, if selling the company is in the best interests of the shareholders,
this is the strategy that should be pursued by the board, recognizing that the CEO
might be replaced and the directors will step down after the sale.
Guard against complacency
The directors of a company need to guard against complacency, which may set in
due to the growing relationship directors have with the CEO over time. Independent
directors are just that – independent. The most important responsibility of directors
is to hire the CEO and determine the CEO’s compensation based on results. The
board of directors must also be capable of terminating the CEO if warranted.
Engage with large shareholders
In his February 2015 letter to independent directors, F. William McNabb III, former
chairman and CEO of Vanguard, the world’s largest mutual fund company, wrote,
“We’ve observed that the best boards work hard to develop ‘self-awareness,’ and
seek feedback and perspectives independent of management. They ask the right
questions to understand how their company may be different than [their] peers, and
whether those differences are strengths or vulnerabilities.”
McNabb continues, “We believe boards that provide such context to investors are
less likely to be surprised by activists or proxy votes, and more likely to have strong
support of large long-term shareholders.” Wise advice.
If you do receive a phone call from an activist, listen
Activists spend a significant amount of time studying industries and the companies
that comprise those industries. Many times they know more about the industry and a
company’s competitors than the company itself. They are a source of valuable
information, and can provide a prospective different than that of the CEO or
directors of the company. The strategies they suggest to increase shareholder
performance may have validity, and change the paradigms of management and the
In addition to public company CEOs, much of the advice above is also valid for the
CEOs of private companies. CEOs, think like an activist. Boards, hold the CEO to
Recognize that the company is there for the benefit of the shareholders and guard
against complacency. Engage with large shareholders, but be careful not to violate
SEC Fair Disclosure rules against providing inside information to selected
shareholders. When an activist calls, listen to their ideas to increase shareholder
value. These are the best defenses against activists, who will go after lower-hanging
Stan Silverman is founder and CEO of Silverman Leadership. He is a speaker,
advisor and nationally syndicated writer on leadership, entrepreneurship and
corporate governance. Silverman earned a Bachelor of Science degree in chemical
engineering and an MBA degree from Drexel University. He is also an alumnus of
the Advanced Management Program at the Harvard Business School. He can be
reached at Stan@SilvermanLeadership.com.