Hemma Visavadia looks at the state of activism and asks whether the best defense is a good offense
Shareholder activism at its most basic is about instigating change: change in how an organization is run, change of management style and structure – but also change in where a company is going. Since the pandemic, activists have targeted companies in one of three ways: a governance standpoint, a financial standpoint or an operational standpoint. Now they are placing more importance on other factors, such as ESG targets (or a lack thereof).
With these new factors in play, how a company handles potential threats and exposures to activism may make or break an organization. Already this year, there have been numerous cases of activists trying to squeeze their way onto company boards to effect change. Some of the top examples in 2023 include Nelson Peltz’s short but punchy attempt to gain a seat on the board of Disney.
Through his company Trian Group, which owns an aggregate of 9.4 mn Disney shares, representing about 0.516 percent of Disney’s total shares, the push to get Peltz on the board became very public. Trian argued that having Peltz on the board would help ‘bring back the magic’. Despite a very public activism stance, Trian eventually backed down in February after Disney cut more than 7,000 jobs.
Another player that tried to use its shareholder power to influence a company is Elliott Investment Management, which eyed up a multi-billion-dollar stake in software house Salesforce. Jesse Cohn, managing partner at Elliott, said at the time: ‘We have developed a deep respect for [Salesforce chair and co-CEO] Marc Benioff and what he has built. We look forward to working constructively with Salesforce to realize the value befitting a company of its stature.’
[Activists] must have a reasonable belief they can get their plan implemented
Prepare, prepare, prepareHow firms prepare for rising tensions among shareholders and avoid future activist activities comes down to careful planning and a great IR program, says Victoria Sivrais, senior managing director at Clermont Partners.
‘Of course, you want the break-glass plan in place and you want to understand your vulnerabilities,’ she says. ‘But if you are constantly in touch with the sentiment of your current investors (and fairly potential investors), and you are evolving the message and engaging with investors to make sure you ward off concerns or issues that might be brewing in the base, your company will be better off.’
For Derek Zaba, partner and co-chair of shareholder activism and corporate defense practice at Sidley Austin, the most important part of any preparedness plan is to ‘put yourself in the shoes of shareholders’.
Zaba, who has been at the law firm for nearly four years, explains that the best way to engage with shareholder activists is to think about the company as they would. ‘Ultimately, the underlying theme across all activism preparedness activities is to think about the company as those shareholders would,’ he says.
‘When I look at the vulnerability of a potential client, there are a couple of questions to ask. The first and most obvious is what’s happening with the stock price and shareholder return. If people are happy because the stock price is up, you generally – though it’s not 100 percent – tend not to have a shareholder activism problem.’
Understanding your weaknessesThe other piece of the puzzle is understanding the weaknesses of each company and where the vulnerabilities are from a governance and board standpoint. ‘If you have directors who have been there for 15 plus years, that is immediately apparent to your shareholders, advisers and any activists that may want to bring about change,’ Zaba says.
‘Think about shareholder activists and how they approach things: one thing they all have in common is understanding what the plan for the company is and how it differs from what’s going on now. Another is that they must have a reasonable belief they can get their plan implemented.’
If an activist is approaching your company, it is likely not the only one that shares at least some of its beliefs, Zaba remarks. Offering some practical advice, he suggests companies think about what is good for the company and the board, as well as what is needed for other shareholders, and try to understand the activist perspective and take it seriously.
‘It doesn’t mean you have to do everything – or even anything – the activist says,’ he adds. ‘But you should think about it because there may be some things that make sense.’
Activism does not occur in a vacuum; it occurs because the activist has a thesis that a company has a problem, whether financial, strategic, operational, governance-related or environmental, and the activist believes it has a solution that will create shareholder value, says Chip Newcom, senior director of IR at internet services company Equinix.
He explains how at Equinix the activism preparedness plan starts with regular communications with top shareholders to understand their views of the company’s strengths and areas for improvement.
In addition, the firm’s IR team, in partnership with legal, hosts an annual governance roadshow ahead of proxy season to discuss any perceived governance, environmental or strategic concerns with the shareholders.
‘Beyond those two efforts, we also actively partner with our surveillance firm to understand changes in our shareholder registry,’ Newcom adds. ‘And we have an internal team identified to facilitate a rapid action plan should an activist decide to engage the company.’
Activists engage with companies because there is some form of perceived poor performance, so the best way to manage them is transparency
Best practicesWorking with a stock surveillance firm can become of utmost importance in identifying an activist before news of its position enters the public realm, says David Farkas, managing director in the activism and M&A solutions practice at FTI Consulting. He explains how understanding real-time shareholder movements can give companies a ‘first mover’ advantage and make them more aware of activists in the stock months in advance.
‘Because many activists build their positions with derivatives, a quarterly SEC form 13F filing may not show this position for several quarters but stock surveillance would flag it immediately,’ he points out.
Beyond engaging a stock surveillance firm, Farkas says a proactive IR group will monitor the investors logging into its earnings calls and investor presentations. As the IR group fields calls from investors, he suggests looking at a firm’s investments and investment history, which can provide context around the investing style of a particular institutional investor.
While it may sound simple, the best way to manage activism starts with the management and IR team being transparent to the market on the company’s strategy and financial outlook, then delivering against that vision, Newcom says.
‘Activists engage with companies because there is some form of perceived poor performance, so the best way to manage them is transparency and delivering against the expectations of your current shareholder base,’ he explains.
ESG issuesWhen an activist shows up, if it pushes a company into a proxy contest or significant challenge, it will have one of two types of argument, Zaba says. The first will be economic arguments, which look at the stock price; the second separate set of arguments will focus on a broad range of ESG issues and compensation.
‘For compensation, ESG issues are important because your other shareholders care about it,’ he points out. ‘But it’s also important because a lot of these other shareholders, especially those on governance teams, are more expert on ESG issues than on economic issues.
‘If it looks like you are not listening to shareholders on ESG and compensation issues, it hurts your credibility when you’re trying to tell people about the economic issues and why the business is right and the strategy is right. Your response in your ability or willingness to take ESG issues seriously plays into your credibility on the things you say about the business and strategy. If your shareholders care about an issue, regardless of what it is, you should take it seriously.
‘All companies would benefit from taking that advice. If an activist shows up and has put money into your company and has some perspectives, you should care what it has to say. It’s worth understanding what people who own a stake in your company think.’
Newcom further points out that activism can occur at any public company, regardless of market size or sector. Over the last several years, many of the largest companies in the world have faced activist campaigns.
It’s worth understanding what people who own a stake in your company think
Activism is here to stayDespite being around for a long time, activism didn’t really pick up steam until the 2000s, Zaba says. ‘Five or 10 years from now, will activism be the same?’ he asks. ‘Will you have traditional shareholder activists? Will there be more players, fewer players, concentrated players? Nobody knows.
‘But one thing is clear: there will always be shareholders willing to stand up and press their points and push companies if the firms are not listening. That is not going to go away.’
According to FTI Consulting’s quarterly Activism Vulnerability Report, large-cap and mega-cap firms represented a major percentage of all public activist demands in 2022. This shows that activists can find value in any company, despite size, and now even more frequently below the 5 percent of total shares outstanding threshold of economic ownership.
‘We’ve observed an increase in public activist demands on behalf of Canada-based companies in 2022, so this will be a trend our team will be following in upcoming quarters,’ Farkas says.
For Sivrais, when an activist comes calling, ‘you must engage with it’, despite the gut reaction to keep your distance. ‘That would be the worst thing a company could do,’ she says. ‘When an activist comes calling, talk to it, engage with it like any other shareholder. Engaging with it to hear its point of view – and gain some really great intelligence as you think about how it might move forward – is critically important.’
