13 steps to guard against shareholder activism
Many boards of ASX 200 companies have stepped up their role in shareholder engagement and helped improve the organisation’s investor relations. Their chairmen meet with key shareholders, proxy advisers and a wider group of stakeholders. But is this approach enough, given global trends in shareholder activism?
Some United States corporates, for example, have formed shareholder liaison sub-committees, such is their boards’ focus on investor relations. And chairmen of leading US corporates, such as Intel, meet several key shareholders every quarter.
More board work on investor relations may be needed given global trends in shareholder activism, where rogue investors are increasingly trying to dictate strategy to companies, force a change in boards or a change of control in the organisation.
Even so, it would be overreaction for Australian boards to form permanent shareholder liaison committees or change board composition, to include directors with an investor relations/shareholder engagement background.
A better approach is ensuring the organisation has the right policies, processes and people to deal with the threats – and opportunities – of shareholder activism.
Here are 13 board considerations:
1. Environmental scanning
Boards of listed companies should recognise that shareholder activism is rapidly becoming a larger global governance issue, as hedge fund activists mobilise support from mainstream investors. Directors should be well read on this trend and follow key activist issues in the main offshore markets, which are ahead of Australia in this area.
2. A structured board approach
Some boards might consider forming temporary working groups, involving directors and management that consider trends in investor relations/shareholder engagement and activism. Could their company be a target of activism and if so why, and who might be the likeliest agitators?
3. The organisation’s internal investor relations skill
Directors must be satisfied their organisation has sufficient capability and experience in investor relations. Boards should ensure there is clear line of sight of the senior IR manager or executive, and be confident that person can work at the complex intersection of IR and environmental, social and governance issues, and is credible with key shareholders in this area.
4. External investor relations capability
Boards of large organisations must be satisfied there is sufficient external capability in investor relations, if needed, through external consultancies. Are those advisers experienced in shareholder activism campaigns, and should the board seek independent advice, in addition to that sourced by management?
5. The board’s investor relations capability
It’s likely that boards of corporates will have to allocate more time to shareholder engagement, as the communication demands of large investors and activists grow. How much time should the board allocate to investor relations? Should the board effort on IR be led only by the chairman or shared with other directors? Should directors be compensated with extra fees if shareholder engagement becomes a much larger part of their role?
6. Understanding the share register
Analysing different shareholders – and investment styles – on a share register has never been more important for listed companies. Boards must ensure they receive sufficient information from management on the make-up of the organisation’s share register and understand if activists hold shares and if they have formed alliances with other activists or mainstream investors, the so-called “wolves’ packs”. Can the board readily identify activists who own a small proportion of stock but speak for a much larger shareholder base?
7. Broadening the shareholder engagement focus
Should the organisation focus its investor relations effort on a wider group of institutional investors? Should there be more ongoing communication between boards and key activist funds that have a negative view on the company? Is the board doing enough to meet with proxy advisers and other stakeholders, such as environmental groups, that can spark activist campaigns?
8. Viewing activists as a source of information
Some organisations take a hostile approach to activists, labelling them as mischief makers who are intent on spreading false rumours and profiting from share price falls. That approach rarely works. Activists are here to stay and many are well informed and capable of forming valuable insights on organisations.
Boards should view proposals from activists and constructivists who develop positive strategies for the organisation, to create shareholder value, as another source of information. That does not mean countenancing every proposal or agreeing with any; but being open-minded about alternative, considered views on strategy can help boards overcome any decision-making bias.
9. Global focus
Boards of large corporates must adopt an international mindset when understanding the organisation’s approach to shareholder activists. More hedge funds from the United States and Europe are expected to target Australian companies with activist campaigns, and the influence of a proxy adviser’s global head office on its local recommendations for Australian companies is important.
10. A clear investment narrative
Too many organisations struggle with producing and delivering a consistent, clear investment narrative to the market. The board and management must be able to communicate their organisation’s “investment story” with precise detail, to a wider range of investors with different styles.
11. Activist monitoring
Boards should ensure the organisation has sufficient monitoring mechanisms in place to stay abreast of positive and negative research on the company, and how that might play out in the financial media. Boards should have access to key investment research and recongise if there is significant misalignment between the company’s investment narrative and the market’s perceptions.
12. Preparation for an activist attack
As part of regular risk-management planning, boards should consider how they would respond to a shareholder-activist attack. What are the policies and procedures if an activist tries to torpedo the organisation at short notice? What are the key continuous disclosure obligations to consider in an attack? What are the broader crisis-management ramifications of a high-profile attack?
13. Thinking several steps ahead
Will the board’s response to an activist attack further inflame the situation by bringing more attention to the campaign and encouraging short-sellers to increase their position in the stock? Could company acknowledgements about the activist’s claims lead to the organisation breaching its continuous disclosure obligations and invite a shareholder class action?
In the high-stakes game of activism, boards must be mindful that miscalculated responses are potential landmines for the organisation.
by Tony Featherstone, Consulting Editor of the AICD Governance Leadership Centre
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