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Shareholder Activism. Can You Defend Yourself?

By Karina Barton
This week’s guest columnist is Karina Barton, a leading crisis management expert and a Director at FGS Global. She has served as an advisor for multi-billion-dollar corporations, high-net-worth individuals, investors and entrepreneurs providing strategic counsel for internal and external communications, media relations, branding, reputation management and crisis management. Karina is well-known in the industry for her stellar skills helping individuals and organizations navigate challenging issues during high profile matters when stakes are high.
To submit a guest column, please email it to our Marketing Coordinator, Nicole Mailhoit at [email protected]

“By Failing To Prepare, You Are Preparing To Fail.” — Benjamin Franklin

In today’s stakeholder economy, stakes are higher than ever. It is not enough for companies to perform well, pay out dividends, and have a stable future. Management and executive team not only have to run business efficiently, positioning it for a long-term success, but also have a sound judgement and a conforming position on social issues, maintain impeccable personal brand and reputation.

What if a company is far from thriving, management is questionable — even if not, you can always find a pressure point if one of the pillars, a company’s financial performance, management team’s and board’s composition and reputation, and a cloudless future, has a soft side — and forgive some public mistakes or failure to address a social issue? And of course, do not forget ESG. So far in 2022, shareholders have filed 172 environmental proposals at public companies’ annual meetings, up 39% over 2021. Proposals regarding companies’ political lobbying accounted for 26% of total ESG campaigns, up 3% over 2021.

The world is watching, so do activist shareholders.

A big change. The SEC’s Universal Proxy rules went into effect on August 31, 2022, making it even easier for activist shareholders to launch public campaigns involving contested director elections. The threshold for dissident shareholders nominating directors is significantly lower — expect a greater number of contested elections. Why wouldn’t they? Shareholders can “mix and match” nominees from the company’s and dissident’s slates of nominees, increasing chances of activist investors’ success as well as saving them millions of dollars on public battles. Did you know that it can easily cost well over a $1 million just to mail voting cards to shareholders? In contested director elections, companies will have to name all director nominees presented for election, including those of the company and the dissident shareholder. Big win. For shareholders.

Battles with activists, public or private, are costly. They drain resources, financial, emotional and … time. They distract management and executive team from their primarily responsibilities of running business, diverting their attention from strategic plans and goals. Employees start questioning the future of the company and their own as part of an organization. Distractions lead to inefficiencies, goal disintegration, and as a result the company finds itself in a worse place than before the activist shareholder appeared on the horizon. Stock price volatility and blow to the company’s reputation is all part of a package. Now, the activist shareholder has even more cards to play with while pushing for its demands. To win, companies need to plan early. Companies have to be ready to react when and if time comes. It usually does. I will not get tired of repeating one of my favorite quotes by Benjamin Franklin, “By failing to prepare, you are preparing to fail.” Shareholder activism defense is not an exception. Is there any?!

What Can Companies Do?

Prepare and do it early. You think you don’t need it, think again.

  1. Set up your advisory team – working group. Establish an internal activism preparation team including key personnel across corporate functions and operating segments, engage outside advisors with deep knowledge of shareholder activism, a strategic communications firm, law firm, investment bank, and proxy solicitor.
  2. Create an activist defense playbook. Perform a thorough vulnerability assessment of the company identifying potential weaknesses and angles of attack. In addition to economic vulnerabilities, look at your shareholder base (Is it too concentrated? Do you have regular touchpoints with top shareholders? Are you lacking on engaging with corporate governance teams at passive index funds?), board and governance composition (What is an average director tenure? Do you have enough diversity?), performance benchmarking (Is the company’s stock volatile? How are operating margins?), and capital allocation strategy (Have your M&A activities been successful historically? What do you project going forward? How much of FCF has the company returned and project to return to shareholders? How is it relative to peers, industry, and market?).
  3. Keep your preparedness response plan and other communications materials up to date and ready. When an activist is knocking on your door, there is not much time to react. If the activist goes public right off the bat, you have to react within the same media cycle, you have 24 hrs. If the activist approaches the company privately, you have a bit more time, which is more a luxury rather than an opportunity. No excuses. You have to be ready with convening the working group as the first thing that you do. Period.

 

In today’s world, activist shareholders gain more and more leverage, their tactics are getting more complex. You cannot control it, but what you can and absolutely should do is to be prepared, overprepared – I do not think there is such a thing after all. This is your responsibility.

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