Avoiding Shareholder Activism

The Conference Board released an executive action report discussing expected trends in shareholder activism in light of the current economic and political environment. The paper is the fourth in The Conference Board series of papers on the oversight role of the board of directors in the financial crisis. It provides board members with a checklist of issues they should consider addressing in their relations with shareholders and, in particular, how to avoid a costly and disruptive battle with an activist investor.

With corporate valuation declining and an economic and political environment favorable to change, the 2009 proxy season is witnessing a new wave of investor demands. In particular, due to the liquidity problems facing many corporations, there is a clear shift from the financial-oriented activism campaign aiming at cash extractions to new initiatives pursuing strategic, operational, and governance-related corrections.

The paper argues that it is in the interest of corporate boards to act proactively, understand shareholder intentions, and correct vulnerabilities so as to avoid becoming the target of activists. A history of positive relations with shareholders, especially the largest ones, can be the most important asset when an activism campaign is launched or is in course. Following the example of Pfizer—which first announced, in 2007, the practice of inviting representatives of investors to meet regularly with the company’s board—several other companies experimented with forms of direct engagement, including road shows and town hall meetings with directors to discuss one or more issues raised by investors.

In these market circumstances, directors should make an extraordinary effort to test the business strategic viability, improve performance and reduce operational inefficiencies. In particular, The Conference Board recommends that board members, among other things:

• Reassess strategic goals in light of new macroeconomic trends, by exploring alternative approaches to business growth and remaining apprised on extraordinary transactions affecting company peers, customers, and suppliers.• Inquire about senior manager’s positions on relevant corporate practices and be persuaded by their arguments. If the company chooses to depart from widely accepted organizational standards, such a decision should be thoroughly articulated and motivated in disclosure documents.

• Revisit any policy, including measures of defense from unsolicited takeovers, which may foster the perception of board entrenchment and stand in the way of garnering institutional support or receiving third party proxy advisor vote recommendations.

• Conduct a thorough review and assessment of their company’s top executive compensation policy to: 1) Fully understand the possible effects of each single component of the pay package (including bonuses, equity-based awards, deferred compensation and severance) on the company’s decision-making process; 2) Ensure the right balance between base salary and other components; 3) Ensure that compensation incentives rely on performance metrics that are appropriately tied to the company’s long-term strategic goals; and 4) Be persuaded that managers cannot distort the intended mechanics and effects of such incentives to pursue opportunistic behaviors.

• Request senior financial executives and internal audit officers to promptly bring to the board’s attention those financial conditions (e.g., a substantial cash balance or a favorable debt-to-equity ratio) that could make the company attractive to activists.

• Develop an inventory of any corporate matter that may single out the company as a target, including foreseeable business events that could trigger activists’ initiatives (e.g. the announcement of an acquisition or of revisions to the policy for the compensation of top executives).

The paper also offers practical suggestions on how to design an action plan and respond to negative publicity campaigns mounted by disgruntled investors. Several current examples as well as a detailed table of cases from the 2009 proxy season are included.

Our paper is available here.

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