Insight From the 2015 NIRI Annual Conference
The most frequent topic of discussion in the sessions and the corridors at last week’s National Investor Relations Institute (NIRI) Annual Conference was activist investors. Attendees flocked to sessions about what to do when activists knock at your door, how to keep them from knocking at your door, and why companies aren’t better prepared for the knock on the door.
As the program write-up for one session described the current situation, “Activists are churning the equity markets as never before, threatening companies of all sizes and putting management careers at risk.”
One of the precepts of investor relations is that companies should strive to attract more long-term shareholders who really understand the company. Short-term investors are viewed as necessary to provide liquidity, but they have no vested interest in the company’s long-term success and their rapid trading can create unwanted volatility. In fact, the subject of the opening general session speaker, McKinsey Global Managing Director Dominic Barton, was the push to move investors away from “short-termism” and “quarterly capitalism.”
Here is the irony: Most activist investors are long-term shareholders who really understand the company — and are heavily invested in it. Activist opponents often claim that activists are short-termers, but, as several panelists noted, research shows that the average activist holding period is significantly above two years. That compares with an average holding period for managed domestic stock mutual funds of less than one year.
With the high visibility of activist investors over the last several years, it is hard to imagine there are many companies that are not on orange alert. According to a 2015 Deloitte survey of nearly 100 CFOs of large North American companies, just under three-quarters say they have experienced some form of shareholder activism and about half say they have made at least one major business change specifically because of shareholder activism.
But if you follow the money that continues to pour into activist hedge funds — the activist war chest at the end of the first quarter of 2015 was nearly double the level at the end of 2012 — you have to conclude that activists will continue to find targets.
With that in mind, here is a consolidation of key recommendations from conference presenters to companies with respect to activists:
- Monitor market activity and what is happening with the shareholder base and in your industry.
- Take an unsentimental view of your company from the perspective of an activist to identify issues that might attract an activist’s attention.
- Address any obvious weaknesses in governance policies, board composition and executive compensation. No activist is going to go to the mat over these issues, but they always add weight to their primary case.
- Regularly and objectively evaluate strategic alternatives. Be able to make a clear and compelling case for the company’s decisions.
- Long before any activist campaign, proactively engage in two-way communications with investors and analysts to gain feedback on issues of concern and establish credibility.
- Prepare an activist response plan and playbook with a designated response team. Then coordinate with your outside IR/PR advisor to conduct a tabletop simulation that puts the plan to the test.
- If and when an activist emerges, don’t be defensive or decline to engage in a frank discussion. Treat an activist as you would a traditional investor — one of the large, long-term investors you wanted.