From a tactical perspective, activists have the ultimate advantage. You can choose whether and when to run your campaign. Inevitably, they will be ready when they choose to launch. Meanwhile, the targeted companies begin the campaign with a defensive stance. Therefore, it is paramount that companies properly prepare for activism before the arrival of activists to level the tactical playing field.
strategy
The best defense against shareholder activism is a clear strategy that is clearly explained to shareholders, skillfully executed, and evidenced by financial and operating results. When considering important strategic and operational decisions, it is often helpful to consider how activists view those decisions. If the board's desired path is a common theme in the activist movement, it helps to ensure that the rationale for its decisions is sound, pressure-tested, and effectively communicated to shareholders.
Relationship with shareholders and other stakeholders
Building trust with a company's shareholders has many benefits, especially in proxy contests. If an activist emerges, it may be important to have a strong history of engagement and build credibility across different types of shareholders. It is important to understand that the shareholder base is not monolithic. Index funds and quantitative investors have a different perspective than long-only investors and hedge funds. Even within these broad categories, individual investors often have different preferences. Research has proven that shareholder engagement is associated with increased shareholder trust in management and boards and a decreased likelihood of proactivity. When companies are proactive, companies with higher engagement have lower campaign costs.
The company should also work to build strong relationships with other important third-party constituencies that may play a key role in proxy contests, such as analysts, proxy advisory firms, and the media. There is. Since the media often have strong existing relationships with activist companies, it is important to level the playing field in normal times by establishing similar relationships with companies.
Board composition and corporate governance
Board composition and corporate governance should be a key focus for boards in normal times. Every company encounters stumbling blocks from time to time, and when they do, governance comes into focus. Governance vulnerabilities will be exploited by activists as part of a broader campaign. It is therefore important to regularly review a company's governance overview and practices to ensure that they take into account the perspective of the company's shareholder base and are appropriately adapted to the company's circumstances.
Board representation is the ultimate influence point for activists. Activists will target any weaknesses in the board's overall composition, structure, and practices, as well as the vulnerabilities of individual directors. Refreshment and tenure are the most obvious goals, but activists will also target skills, experience, and background if they don't align with activists' views of what they want in the boardroom. Boards should regularly and objectively assess their company's composition to ensure it reflects the right mix of backgrounds and perspectives needed to oversee the company's strategy and operations.
emergency response plan
As with any other potentially high-impact crisis situation, it is helpful to think through a contingency plan for your activity. An effective contingency plan includes implementing early warning systems to detect the arrival of activists and identifying a team of advisors to guide the board and management in the event of an activist outbreak. . For the most likely contingencies, it is helpful to have a “break the glass” response plan, especially in the case of an “ambush” public attack without advance warning. It is also helpful to conduct annual tabletop exercises with key advisors to simulate different activist scenarios. Additionally, companies should consider shelving shareholder rights plans in case activists or other hostile parties begin to rapidly accumulate stock in the company.
