In 1926, Benjamin Graham wrote a letter to board members at Northern Pipeline, in which he owned a small stake, requesting they pay more dividends to shareholders. At the time there were no regulations mandating the sharing of financial reports so shareholders were kept largely in the dark about the true value of their investment. However, Graham astutely observed that Northern Pipeline held so many securities that, if liquidated, it could distribute $90 (£69) per share to its investors.
The board rejected his initial request but, after Graham convinced a group of fellow stakeholders to support his campaign, he eventually got his way. The episode marked one of the first instances of activist investing and Graham would later be referred to as the “father of value investing”.
100 years later, the practice is rampant. Last year, a record 160 investors mounted activist campaigns against global companies to push them to make strategic and organisational changes, according to data by Barclays. Activists took aim at chief executives with a record 27 replaced, including those at Starbucks, Gildan Activewear and Sensata Technologies.
More companies are likely to face shareholder attacks in the coming months, according to Parham Kouchikali, a partner in the disputes and investigations team at Taylor Wessing, a law firm. Macroeconomic changes have created ample opportunities for activists to push for operational improvements and the law is increasingly being deployed by minority shareholders to scrutinise directors’ duties and significant decisions made by the board, he says.
“Often this is driven by a broader activist agenda such as ESG concerns,” Kouchikali adds. “Such minority shareholder claims are not always about financial redress – they can be a means to cause disruption, get a message across to the public and put pressure on the board. “
Boards must ensure their procedures are robust and that decision-making at the top level is clear, evidence-led and properly recorded, Kouchikali advises.
CFOs: aware but unprepared
However, surveys show that CFOs, who are critical players in rebuffing activist investors, are not sufficiently prepared for this added pressure.
More than one in four finance chiefs expect their company to be the target of an activist investor campaign in the next two years, according to a Bain & Company survey. But only half of CFOs report having any form of action plan.
“It’s one of those situations where most CFOs do not know what to expect until it happens. By then, it’s usually too late,” says Peter Shively, a partner at Bain & Company who led the study.
Most CFOs don’t know what to expect until it happens. By then, it’s too late
A failure to prepare can be both costly and stressful, he adds. Without a plan in place, firms risk being unable to defend against these campaigns, potentially resulting in a loss of control, a worsening of financial performance or long-term reputational damage.
Most CFOs that had been through an activist campaign said they wished, in retrospect, they had prepared more and 89% chose to strengthen their defence strategies after the campaign ended.
Preparing for activism: think like an investor
“The best way to defend against an activist is to think like an investor,” says Shively. These players are driven by the perception that investors are not getting the value they should. CFOs that are able to anticipate investor demands and initiate changes are less likely to attract unwanted attention and will be one step ahead if the firm is targeted.
“Ultimately, when an activist comes knocking, the best thing to say is: ‘I agree and we’re already working on it,’” Shively says.
Effective preparation starts by knowing who the company’s investors are and what motivates them, along with an honest evaluation of the firm’s past performance and future strategy. CFOs are responsible for overseeing this, striking the right right balance between allocating profits for future growth and distributing them to shareholders.
Most importantly, they should be effectively communicating the firm’s business strategy to the market. If there is a mismatch in expectations, Shively says it may be a sign that it’s time to evolve the firm’s investor base.
Having a dedicated response team is critical. This should consist of a PR team, a group of legal advisors and an investor relations (IR) function, which reports to the CFO.
Responding to an attack is time-consuming and stressful. Nearly 40% of CFOs who faced activist pressure said the experience can become a hinderance for management, not to mention costly for those that saw no improvements to the company’s value, or worse, experienced a decline.
“These campaigns are a major distraction and heavy burden for the CEO, the CFO and the head of IR,” Shively stresses. “Doing as much preparation as possible can offer some clarity of thought during what is typically a very stressful period.”
A force for good?
As a result, activist investors are often regarded as troublemakers, with an aggressive attitude toward management and hostile approaches focused on making a short-term profit.
While they can create issues for management and board members, in some cases, they can be a force for good, even if their tactics are less than favourable.
A third (32%) of finance chiefs said an activist campaign improved their company’s value, while over half (57%) concede that activists play a valuable role in the market and can ultimately improve shareholder value.
Even when there are no material benefits, Shively says effective handling of activist campaigns can enhance a CFO’s personal reputation and a company’s relationship with its investors.
Activist investor mistakes
John Beck, an attorney at law firm Beck & Beck, has handled nine cases involving shareholder actions over the past five years, ranging from mild pressure put on companies to major board overhauls. His advice to boards and leaders is not to over-lawyer early.
While it can be instinctive for many firms to go straight to legal defence mode, in some activism cases, transparency can defuse tension faster than stonewalling.
“In one case, a CFO I worked with took a hybrid approach,” he says. “Limited legal action, paired with voluntary disclosures and early conversations with dissenting investors, helped avoid a full proxy battle.”
A proxy battle is when shareholders gather enough support to win a corporate vote. Beck estimates that this saved the company over $400,000 (£309,000) in legal and PR costs.
Executives should assume every word could become public
A lack of documentation hygiene can also weaken a firm’s position during an activist campaign. Even minor documents, such as board minutes and email threads, can quickly turn into liabilities, Beck explains. “I’ve had to review thousands of pages for clients fighting off activist campaigns and poorly phrased board discussions have tanked defences more than once,” he says. “Executives should assume every word could become public. It changes how they write.”
Underestimating the power of social media is another common mistake. Beck recalls how one CFO found this out the hard way when an activist group used a few cherry-picked performance stats and spun them into a viral campaign. The legal position was solid, but the reputational hit took months to recover from, he says. “These days, part of my strategy includes reviewing how the company’s message plays publicly, not just legally.”
Company management and the board cannot afford to ignore an activist. They have the power to hold management’s feet to the fire and demand results and are increasingly well-versed in applying pressure to get their way. With activist campaigns on the rise, CFOs would be wise to have a good defence plan up their sleeve.
In 1926, Benjamin Graham wrote a letter to board members at Northern Pipeline, in which he owned a small stake, requesting they pay more dividends to shareholders. At the time there were no regulations mandating the sharing of financial reports so shareholders were kept largely in the dark about the true value of their investment. However, Graham astutely observed that Northern Pipeline held so many securities that, if liquidated, it could distribute $90 (£69) per share to its investors.
The board rejected his initial request but, after Graham convinced a group of fellow stakeholders to support his campaign, he eventually got his way. The episode marked one of the first instances of activist investing and Graham would later be referred to as the "father of value investing".
100 years later, the practice is rampant. Last year, a record 160 investors mounted activist campaigns against global companies to push them to make strategic and organisational changes, according to data by Barclays. Activists took aim at chief executives with a record 27 replaced, including those at Starbucks, Gildan Activewear and Sensata Technologies.
