How boards of directors can defend against activist investors

The numbers don’t lie: the activist investors are coming, whether you like it or not. In the first half of 2016, 463 companies worldwide were the subject of activist demands looking to shake up a board of directors or pivot a company, according to a review from Activist Insight. Despite a February article from Fortune claiming activists were losing their luster, that number is up from 405 in the same half of last year with increases in the U.S. Europe, Asia and Australia.

David Beatty, an adjunct professor of strategic management and the Conway Director of the Clarkson Centre for Business Ethics and Board Effectiveness at the University of Toronto’s Rotman School of management, says there’s no way of knowing if this is the tip of the iceberg or the iceberg itself.

“These are the ones you see… I don’t know whether that’s 30 per cent or 70 per cent,” says Beatty, who has served on 35 boards of directors and been chair of eight publicly traded companies. “This is a huge phenomenon and it’s growing and spreading – anything that’s publicly traded is going to have somebody from outside asking how these people are doing versus what they might do.”

The key for board of directors to defend against activist investors is to understand how they work. But first, a little history lesson on the evolution of the activist.

Know your enemy

Beatty points out that sometime between the 1990s and the early 2000s, activist investors experienced a rebrand from the “corporate raider” moniker of the 1980s and 1990s.

“They’d go in, kick shins… these were nasty mudslinging campaigns so the pension funds would say ‘this is not a respectable pursuit, they may be right but good luck to them’ but this time around they’re known as activist or strategists,” he explains.  Sometime in the past decade that reputation pivoted from nasty to thoughtful and clever.

Nowadays, in many cases, activist investors will spend a couple million dollars investigating these companies and sharing the study with each other before forming wolf packs and finding strategic backers in pension plans and large hedge funds.

“They don’t buy large chunks necessarily, they may buy one or two per cent,” says Beatty adding that when they do, they look up big shareholders tally how much they own and convince them to sit down for an informal meeting. “They’ll say ‘I think this thing is trading at about a half of what it ought to be if it were properly run.’ ”

By the time they place the call to the company itself, they may have informally solicited 20 to 50 per cent of the stakeholders.

“That’s brand new,” says Beatty, “The mobilization is now not in the millions or billions, it’s in the trillions of dollars.” He points to huge funds like BlackRock – a firm handling more than $4.6 trillion in assets – throwing punches with activist campaigns. “This has never happened before.”

So how does a board defend against the tireless campaigns?

Be proactively paranoid

“From a board perspective, I think number one is you’ve got to assume that one to five companies are looking at you and if you’re underperforming versus your industry or even just in absolute returns, you will get a phone call – there’s no hiding,” He recommends getting proactive by engaging your shareholders directly, especially the larger institutional ones.

“Andy Bryant, the chairman of Intel now meets with three or four of their largest shareholders every quarter,” says Beatty. It’s a major change from the status quo, which usually relied on investor relations departments to bridge the gap between the board and investors. “That’s a fundamental change in board management relationships as a consequence of this.”

Hire outsiders to examine the company’s strategies

“When you’re thinking about your corporate strategy, it’s not just what you think should be done with the business, it’s maybe what others are thinking should be done with it,” says Beatty. “Where do you get your new ideas?”

His recommendation is to bring in consultants to examine the company and share that insight at the one or two day offsite strategy meetings.

“One large cap company I know of said to one of its directors, ‘I want you to hire a consulting firm, spend three months looking at us from outside using whatever you want, then you two guys run the strategy session,’ ” he says. The benefit being to get a well-founded idea of how the company looks from the outside.

“The whole notion of strategy being run by only your management team and drinking only that bathwater should be gone,” says Beatty. “It’s not happening in a lot of places but it should be a new practice that boards develop.”

Promote truly transparent decision-making


By bringing in outside strategists to offer their take on the company and its decision-making process, Beatty suspects it’ll lead to an evolution in how those key strategic decisions are made. With the potential that three or four activists could be looking at how to twist up your company, it becomes imperative to be truly transparent about decisions.

“Instead of trusting and believing your management team is the only answer in the world (you’ve) got to say to them – ‘be much more open with us, we’ve got to understand what other (decisions) we might have all of the time,’ ” says Beatty adding that transparency, in effect, becomes a survival mechanism for countering the emerging activist threat.

Fail to adapt and your board could be gutted.

“Somebody else will suddenly show up on your doorstep and you’re all gone,” says Beatty. “(Activism) is an absolutely transformative force on the world of publicly traded companies – it’s everywhere now, it’s a virus that’s spread.”


Andrew Seale

Andrew Seale is a Toronto-based business writer who contributes frequently to Yahoo Canada Finance, The Globe and Mail's Report on Business and The Toronto Star.