Shareholder activism is in the news daily, with both existing shareholders and activist fund investors of publicly-traded companies demanding improved corporate governance and performance. No longer are activists viewed as the corporate raiders of the past. Their demands for change, particularly for the election of their nominees to boards of directors, are being endorsed by the influential proxy advisory firms and supported at the ballot box by large institutional investors. All industries, and companies of all sizes, have become subject to increased scrutiny. PepsiCo, Mondelez, Cadbury Schweppes and Kraft are examples of food and beverage industry giants that have been challenged by activists.
Today’s activists are focused not just on corporate governance and corporate social responsibility, but on maximizing value. They demand changes to boards of directors and management, financial restructurings, strategic actions like spin-offs of divisions, and the blocking of significant transactions proposed by management. When a dissident shareholder approaches management, it will have had the benefit of months of preparation to assemble a team, prepare a “white paper” criticizing the issuer’s business strategy, and develop a plan for communicating with other shareholders and the media and winning support for its position.
The good news is that an issuer can take action now to both reduce the likelihood of shareholder activism and to be better prepared should a dissident emerge. Ongoing corporate governance reviews are essential, to ensure that the board of directors is perceived as independent and engaged. As well, analyzing the business strategy for weaknesses that may be highlighted by an activist is critical. But equally important is a robust investor relations program designed to achieve a full understanding of the company’s investor base and to reach out to individual shareholders to obtain their input and assess their support. Further, in order for an issuer to be in a position to respond quickly and effectively to an activist’s demands, it should do some advanced planning now to determine who will comprise its response team, review the steps to take if challenged and update members of its board of directors on their duties and next steps.
Focusing now on corporate governance and performance, and developing a preliminary action plan should an activist surface, will pay off in both the short- and long-term.