Michal Katz is Co-Head of the Technology Investment Banking Group at RBC Capital Markets. This post was originally published on her LinkedIn account.
The threat of shareholder activism continues to loom for corporate boards, even as activism evolves as an investment strategy. While the number of activist campaigns has increased 25 percent over the past five years, the companies targeted, the activist “players” and their playbook are changing.
Large, well-known companies have not escaped the plight of their smaller brethren. One quarter of 2017 activist campaigns have targeted companies with a market cap of at least $50 billion, including Proctor & Gamble, ADP and BHP Billiton. Moreover, along with the “founding fathers” of activism (Carl Icahn, Nelson Peltz, Bill Ackman), a new class of hedge funds, as well as traditionally passive investors, are seeking corporate engagement, change and influence.
What does this mean for companies? Activist-type challenges can come in new ways today, so companies need to do all they can to avoid complacency. Companies can stay out of activists’ crosshairs by taking a critical look at their strategy, operations and policies to affect their own changes before someone forces them to.
The shifting sands of activism
The number of companies facing high-profile activist campaigns hit more than 300 in 2016, the third consecutive year of 300-plus campaigns. However, their track record of success has been mixed.
Until recently, stocks would immediately benefit from a so-called takeout premium the moment an activist took a position. However, failed sale processes, their inability to mix up the board with their own representatives and unproven results from share repurchase programs have called into question activists’ ability to create long-term value. Anecdotally, the S&P 500 Activist Interest Index is down slightly this year, compared to a more than 8% gain for the broader index.
Large passive investors like Blackrock, Vanguard and State Street are also becoming more active as their investors demand greater engagement with management. They are pushing back, most recently teaming up to pressure Exxon Mobil on climate change. Unlike activist managers that often get out of underperforming positions more quickly, passive investors with a longer investment horizon can have a powerful voice in management compensation, acquisitions, divestiture strategies and more.
We are also seeing more of a mix of styles among activists. Of course, some are acerbic with public letters and aggressive proxy campaigns. Others are more constructive and seek a dialogue with their targets. Still others are something entirely different, like the now-famous spontaneous argument on live television between Icahn and Ackman over whether to buy or short Herbalife.
The typical activist premise is to drive greater returns for shareholders with a change in strategy, such as selling non-core assets or seeking a merger partner, shaking up the corner office or board, or demanding a return of capital like a buyback or dividends. In theory, no one should know more about a company and industry than the executives and board. This means that companies should be able to do exactly what an activist investor does. If done correctly, companies could make activism redundant, at least in some cases.
Disrupt yourself or be disrupted
That is not to say that some companies and boards don’t need a wake-up call. Many do. Some boards have gotten too comfortable or been ineffective addressing strategic and operational challenges to adequately serve their constituents — customers, employees, partners and broader communities.
Carl Icahn has said his efforts to implant his own board members at target companies have made them “more productive and competitive,” citing share buybacks and other measures he pushes for. Numbers prove him right in many cases, but it’s important to remember that the role of a board isn’t to run a company; it is to hire and fire the leadership team and support and challenge its strategy.
Shareholder activism, whether from traditional or new players, isn’t showing any signs of going away. However, companies can stay out of their crosshairs by keeping their eyes and minds open.
While the best defense is always performance, cultivating disciplined, proactive boards with fresh faces, open thinking and self-awareness is crucial. In short, companies can go beyond worrying about whether activists are there to help or hurt: They can fine tune their strategies to fit what used to be the activists’ playbook. Not falling into the trap of complacency, incumbency, entrenchment and the echo chamber is paramount.
When companies create an atmosphere in which the board can operate as its own proactive activist and let the business leaders run the business, all constituents should benefit. The bottom line is, the new playbook and players put the onus on board members to take on real roles and, in some cases, be their own Carl Icahn.