As if company boards do not already have enough to think about – cyber threats, febrile geopolitics, and the perennial challenge of sustainable growth – along comes more activism.
Yes, that’s right. While shareholder activism has long been a feature of corporate life, this year is already shaping up to be particularly busy on the activism front.
According to the law firm Cravath, Swaine & Moore, in the first quarter of this year, as many as 65 campaigns were launched globally, more than two thirds of these in the US. While the global number is down slightly from 2023, the US saw a 20% increase from last year.
Financial performance, coupled with the prospect of cutting costs, tops the activists’ target lists. For example, in May, activist investor Ancora won three Norfolk Southern board seats by promising to force the railroad company to streamline its business. A month later, unhappy with Autodesk’s handling of an investigation into accounting practices, Starboard Value pushed for new board members and improved margins at the software company. And, in a sign of how US activism has an increasingly global reach, Nelson Peltz’s Trian Partners recently took a stake in the UK’s Rentokil, the worlds’ largest pest control company, and, according to media reports, has spoken with management about improving shareholder value.
With this increased activity come some interesting trends.
First, activists now focus on seating new directors rather than demanding strategic acquisitions or divestitures. According to the Harvard Law School Forum on Corporate Governance, director changes were the most common demand in the first quarter, appearing in 49% of campaigns compared to M&A demands, which appeared in only 29%. According to the law firm Vinson & Elkins, activists are proposing better candidates for their slates too, increasingly choosing professionals with extensive industry knowledge, for example.
Second, corporations face an environment in which matters that have long been uncontroversial may now be problematic. We’ve seen activists target policies that were never at issue in previous campaigns. One example is “national security” concerns. Activists are questioning links directors or senior managers may have, or may have had, with states that have become increasingly unfriendly to the west, such as China and Russia.
Third, we have seen that both companies and activists now appear more willing to negotiate, often on seemingly less hostile terms. In other words, there now appears to be a behind-the-scenes dialogue, one in which an investor may name several director candidates and solicit a response from the company, as opposed to nominating a slate in a very public way.
Facing such trends, how might the savvy CEO react?
As always, it is crucial to know your opponent. Even when activists appear friendly and foster a good relationship, it is no less important to gather information about them. Do they focus on short term turnround or long term viability? Does the entity have a record of operating improperly or unethically? How have they behaved in previous proxy battles? What is their modus operandi?
In the event of a proxy battle, it is equally important to look at any board nominees proposed by activists. Even when director candidates appear impressive, you still want to know as much as possible about them; to understand their vulnerabilities as well as their advertised strengths. A substantial amount of this knowledge comes from undertaking a comprehensive examination of the public record – looking at litigation or criminal records, judgements, liens, bankruptcies – and social media activity by that individual, since even one intemperate remark can reflect on the candidate. On several occasions, we have seen candidates who were not adequately vetted by activists forced to withdraw their candidacy when thorough investigations conducted on behalf of the targeted company identified problems.
It is also important to understand the nominees’ professional history. What is the candidate’s experience in the relevant sector? Is the nominee a professional “hired gun,” someone who has been proffered perennially by the investor group, no matter their target? Does the candidate have previous ties to the activists? As many such individuals have a history of board service or have held senior executive positions, it is crucial to examine the companies with which they have been affiliated. What happened at those companies when the candidates were in charge? Is there any pattern of problems occurring at companies during their tenure? How did they handle adversity? Talking to people who have worked with the candidate or to fellow board members – or even to former adversaries – can be useful.
All of this information will inform a company’s strategy, during negotiations and, should negotiations break down, during the proxy battle itself. Even when activists appear willing to seek a peaceful resolution, management needs to protect the interests of its shareholders through targeted and thoughtful investigation.
