A Deloitte survey of CFOs of US public companies conducted in 2015 identified the following trends. Our experience indicates these trends still hold true, and in some cases, they have intensified.
- Just under three-quarters of US public companies surveyed experienced shareholder activism, most often in the form of direct communication to management or the board.
- About 30 percent experienced indirect communication in the press or social media.
- About half made at least one major business change because of shareholder activism; the most common were share repurchases, management or board changes, divestitures, and performance improvement initiatives.
Because shareholder activism shows no sign of abating, companies may need to review their approach to investor engagement and arrive at response protocol to implement when an activist emerges on the scene.
Activism most often comes down to differing views on how capital should be allocated. There is an ongoing discussion in the marketplace about the short- versus long-term orientations of activists, but the fact is that different activists simply hold different views.
Many institutional investors, particularly pension funds and insurance companies that seek to match assets with liabilities over the long term, want to invest in companies with well-established strategies and an established record of performance. Senior leaders of some prominent investment funds also have expressed a strong desire for their portfolio companies to take a long-term view, but not all investors in a company will share those goals and interests. Different investor classes will have different investment goals, time horizons, and priorities, which can create conflicting objectives and opinions among shareholders and complexity for the organization’s senior leaders.
A given company’s activists and broader shareholders are not homogeneous. When the current wave of activism began, many corporate leaders and observers characterized all activists as seeking short-term monetary gains in ostentatious ways. In truth, many have been discreet, constructive, and respectful in making their cases to companies. They often have longer-term concerns and limit their efforts to conversations with management and suggestions for boosting performance or eliminating underperforming assets. Others have been quite aggressive, leveraging the media to dramatic effect with the goal of altering the structure of the board, replacing senior executives, divesting specific subsidiaries, changing ESG policies, or transforming operations.
The companies most attractive to activists tend to be those with strong cash flows, low dividend payout ratios, conservative balance sheets, recent underperformance, or assets ripe for selling or spinning off. Other targets are those companies operating in industries marked by shifting market forces and changing business models. The board should be acutely aware of all these conditions and actively discussing them with management regardless of activist activity. Activism merely sharpens the focus on such issues, and it might intensify the need to address them. Efforts to address shareholder activism are most productive when they are viewed and conducted in the context of a robust investor engagement program, usually found within the company’s investor relations department. Strong investor engagement enables management to understand the company’s shareholder constituencies and their goals, monitor changes in the makeup of the shareholder base, communicate short- and long-term strategies effectively, and cultivate both reliable supporters and trusted critics in that base.
As part of its oversight and governance responsibilities, the board should ensure that management has established an investor engagement program and has taken steps to prepare a response to either friendly or confrontational activists when needed. The board must also coordinate its thinking and approach to activism with management and the investor relations team. It is critical to create and enhance a robust capital allocation methodology that is communicated externally in an appropriate manner.