By Geri Westphal
Growing corporate cash piles and low investment returns are prompting investors to speak up.
Over the past several years growing stockpiles of corporate cash and low investment returns have emboldened more activist investors to speak out about how large organizations are being run. There is specific angst around corporate spending and asset sales, which have prompted demands for sharp cost reductions, lower executive compensation and more often than not, cash back, higher dividends and share buybacks.
According to the Manhattan Institute’s Proxy Monitor database, which tracks and analyzes shareholder proposals, in 2012, 53 percent of Fortune 250 companies faced some type of shareholder proposal. It should be noted that while shareholder activism is mainly seen as contentious, sometimes it can be positive. For instance, in some cases the activist can make positive recommendations. But most times it’s a signal to circle the wagons.
“Activists usually bring one agenda to the table and oftentimes forget about the other aspects of running a successful business,” said a treasurer at a recent NeuGroup Treasurers’ Group of Thirty (T30) meeting. And size doesn’t matter. “It used to be just big companies that were targeted by activists, now everyone is fair game,” said another treasurer.
According to corporate governance research site SharkRepellent.net, of the 137 financial or board-seat activist campaigns announced as of August 12, 2013, nearly 30 percent involved companies with a market cap of over $1bn, up twenty percent from 2012.
With the increasing involvement of large, formerly passive, mutual-fund firms and hedge funds supporting activists in their campaigns has come more sophisticated corporate governance teams willing to vote against management.
Activists control an estimated $85bn in assets, and high profile names like Carl Icahn, William Ackman, Daniel Loeb, and Ralph Whitworth can use their market influence to have a big impact on a company’s stock value, as seen recently when Mr. Icahn tweeted that he’d taken a large position in Apple. The tweet sent shares nearly 5 percent higher that day.
I Can Do It Better
So what exactly are activists after? The most common types of activism include:
- Corporate-governance activists. These activists rarely run for board seats, but often push for board independence and/or corporate action on environmental issues.
- Economic activists. This type of activist is most often focused on “balance-sheet activism,” which is a strategy designed to push for a dividend increase or share buyback. These activists typically use a proxy fight for board representation or the removal of directors to achieve their goal.
- Mergers & Acquisitions. M&A is another area that has experienced an increase in the level of shareholder activism. Once a deal is announced, shareholders have banded together to demand a higher price, even if there is no other suitor. Since 2005 only 3.2 percent of proxy fights in the SharkRepellent database have been against a merger agreement. However, during the first half of 2013, there were several high-profile proxy fights, notably at Dell. Some believe this is the wave of the future.
Notable Recent Battles
In May of this year, Hess agreed to give the activist hedge fund Elliott Management three board seats in exchange for the fund’s support of the company’s slate of directors. The agreement ended a long battle with Elliott agreeing that Hess had lacked discipline and accountability for years. Elliott argued that Hess overextended the company internationally while not acting quickly enough to take advantage of the drilling boom in the shale oil fields in North America.
Microsoft made a landmark decision in late August 2013 by giving a board seat to an activist investor for the first time in their history. It named G. Mason Morfit, head of ValueAct Capital Management, who owns less than 1 percent of Microsoft stock, to the Board. Concurrent to this announcement was the retirement of Steve Ballmer, which some had speculated was directly related to the board assignment. Many believe that ValueAct was seeking support among other investors for a proxy fight against Microsoft, and that this board seat announcement was a way to end that fight. As part of the announcement to the board, ValueAct agreed not to continue its fight and to not disparage the company or its executives. The agreement provides for regular meetings between ValueAct’s president and selected Microsoft executives.
The question now is whether these activist victories will encourage louder, stronger activism against others. Will these fights influence the high-level decision-making within other corporations?
Be Ready
The best answer to that last question is that self-screening and proactive planning can help companies be ready in the event it becomes necessary. Since many activists are looking to benefit from target attacks alone, firms should have a plan ready in the event they are identified as a target.
One way to combat the negative effects of shareholder activism may be to implement a program of engagement with your top investors. Many large MNCs have very active investor relations programs that identify and engage with the top ten (or more) shareholders. These programs are seen as a positive way to stay in touch with the investor base while allowing their thoughts and opinions to be heard before things go negative. Keep talking to them, keep them informed on what’s going on. In most cases, according to practitioners, when activists attack, loyal investors will give you some time to right the ship and straighten things out.
Many companies are preparing for the activists by adopting provisions to fend them off with long and convoluted notice periods. Many are adopting shareholder-rights plans, or poison pills, with low thresholds that effectively limit the number of shares an activist can acquire (to, say, 5-10 percent of a company).
Also a strong enterprise risk management program can help identify and define mitigation strategies to deal with activism. If companies are willing to look at themselves in this holistic manner with an eye toward identifying the critical risks, they should be better prepared to defend against anything an activist group can think of.
Many believe that despite the expectation that shareholder activism will increase over the next several years, if companies and boards are doing their jobs, anything a shareholder activist can conjure up will have already been reviewed and considered by management.
If it’s already been considered using appropriate information and sound reasoning, the outcome of the decision should be more readily supported by shareholders, including activists.