Directors: Take Activist Threats to Your Reputation with a Grain of Salt

Criticizing boards and management teams in public letters and news media often gets shareholder activists what they want from boards. These tactics, common in proxy contests, regularly work in the absence of dissident director nominations. At times, just the threat of a public campaign and negative media coverage can get activists their desired results, even board seats.

Directors may agree to activist demands when they believe doing so serves shareholders’ best interests, including by avoiding the costs and distraction of a proxy fight. Another reason boards give in to activists, rarely acknowledged but supported by empirical evidence, is directors’ fear of the damage a prolonged campaign will do to their public image and the related personal and professional consequences.[1]

These concerns are overblown. They are based on misperceptions, particularly common among directors without activism experience, about how a public activist campaign will unfold at their company, e.g., what activist attacks and the ensuing media coverage will look like. Activists, of course, can take advantage of and even encourage these misconceptions to increase negotiating leverage.

Overestimating the reputational threat from activists can lead to negative outcomes for boards and shareholders. While compromise may be the best path forward in an activist engagement, a fear-driven “settlement at all costs” mentality can lead to hasty settlement agreements with unforeseen consequences. When agreeing to add a particular activist director to the board, for example, incumbent directors may fail to realize how the activist’s shorter investment horizon will conflict with the expectations of other large shareholders, or how much time the activist will demand of management. The board may also be unprepared for the increased probability of material, non-public information leaks.[2]

Below, I debunk four myths underlying outsized fears of activist attacks among certain directors. I then recommend steps for companies and boards to prepare for and respond to activist campaigns targeting individual board members.

Myth #1: Activist attacks on directors inevitably get widespread attention from high-profile media outlets and important constituencies.

Reality: Most director-focused attacks receive limited media coverage and won’t appear in national press. Companies also have the opportunity to defend their board.

Many directors expect that an activist campaign at their company will appear in high-profile media outlets. Boards should remember that publications like The Wall Street Journal only cover a small fraction of the hundreds of campaigns launched in any given year in the US. These outlets are most interested in brand name activists targeting well-known (often large- or mega-cap) companies, which excludes most activist engagements.

When the media does follow an activist campaign, articles – especially in mainstream press – rarely go in-depth on criticisms of directors. Additionally, with the exception of certain, mostly pay-walled, trade publications, outlets cover relatively few campaign developments or activist statements.

Likewise, as upsetting as it is for those of us who write shareholder letters in proxy contests, many retail investors (a key audience for these “fight letters”) throw them out before reading. A large number of activist missives also reach a small and/or disinterested audience, especially in the absence of a pending shareholder vote.

Finally, companies have opportunities to refute activist claims and defend their board. The tactics activists use – like background briefings to reporters, press releases, and modified investor presentations for shareholders and proxy advisors (“fight decks”) – can help issuers set the record straight and give important context to activist claims. Working with a financial PR/IR firm with activism experience can help companies and boards use these and other methods to balance the public narrative.

Myth #2: The Universal Proxy Card has significantly heightened reputational risk for directors. 

Reality: Criticism of board members has always been a part of proxy contests. Also, activist campaigns remain focused on more than just the director-candidates.

The Universal Proxy Card (UPC), introduced in September 2022, allows shareholders to mix and match candidates from the company and dissident slates in proxy fights, rather than making them choose between slates. This is increasing the attention paid to individual directors in proxy fights. For example, proxy advisors are looking more closely at both sides’ candidates.

While the UPC is altering proxy fight dynamics in several ways, it has yet to meaningfully change the substance of activist criticisms of directors. Activists’ open letters, media statements, and presentations have critiqued board members’ experience and skills for years. Last proxy season saw more of the same,

The 2023 proxy season also showed that activists must still focus their campaigns on more than just incumbent directors to win. Virtually all successful activist campaigns, like Sarissa Capital’s proxy fight at Amarin, included a broader case for change at target companies. These results are not surprising. Leading proxy advisor Institutional Shareholder Services has said that when assessing the merits of a dissident campaign, they will continue to begin by evaluating whether change is needed at the company.[3] Vanguard and other large institutional investors have expressed similar sentiments.[4] Accordingly, directors are not, and are unlikely to become, the sole focus of activist campaigns and related media coverage.

Myth #3: Activist attacks hurt directors’ career prospects by making them less appealing to other boards.

Reality: Being targeted by activists does not generally jeopardize a director’s other board seats or limit future opportunities to serve on boards.  

A 2014 study examining the career consequences of activism for directors found that even being directly targeted by an activist had no impact on a board member’s other directorships.[5] While the study unsurprisingly concluded that the boards of targeted companies experience elevated turnover, the reputational fallout from activist campaigns appears contained.

Additionally, the proliferation of new activist funds and the growth in their AUM since 2000 means that serving on a board targeted by activists has become far more common. As of 2022, nearly four out of every 10 directors of Russell 3000 companies have been on boards that experienced public activism, most of which occurred in the prior five years.[6] Notably, many directors of blue-chip companies have previously been in activist crosshairs. For example, at least two members of Microsoft’s 12-person board – GSK CEO Emma Walmsley and ADP Executive Chair Carlos Rodriguez – were the subject of highly publicized activist attacks at their respective companies.

Myth #4: Activist campaigns involve the kind of mudslinging and character assassination seen in political campaigns.  

Reality: Mudslinging and attacks on directors’ characters, especially without a factual basis, happen far less than many directors expect and can be counterproductive for activists.  

Many directors without experience dealing with activists expect campaigns to involve the type of character assassination common in political elections. Activists’ trumped-up threats to boards have contributed to this misperception. Media outlets’ tendency to cover more contentious fights – seen last spring in the flood of articles about Carl Icahn’s campaign at Illumina – has also played a role.

Directors should remember that the decision-makers in most proxy fights – institutional investors and (indirectly) proxy advisors – want arguments focused on value creation, not irrelevant personal attacks. Most activists understand this. While directors’ professional histories are fair game, and activist criticisms of board members often omit important context, outright fabrications are rare and can backfire.

Importantly, the SEC prohibits criticisms that impugn an individual’s character, integrity, or personal reputation without a factual basis. While some activists may make personal attacks in news media without attaching their name, such anonymous criticisms have less credibility, and reporters will still do basic fact-checking and contact the company for a response. In sum, proxy contests are not political campaigns. Both sides are held to higher standards of behavior.

Preparation can protect reputations and help directors do the right thing when an activist comes knocking.

By understanding that activist threats to director reputations are exaggerated, and by preparing in “peacetime,” boards can confidently push back on value-destructive activist demands and better assess the implications of any settlement agreement.

While the UPC has yet to fundamentally transform activism defense, the below recommendations for preparing for activist approaches reflect an increased focus on individual directors in campaigns.

• Assess vulnerabilities, including in director backgrounds: Anticipating likely activist campaign themes can help companies neutralize or prepare to respond to activists. Given that activists look closely into directors’ personal and professional histories, issuers can benefit from exploring potential weaknesses in director backgrounds, e.g., by reviewing TSR performance at companies where a director served on the board or management.
• Have a plan for when and how to respond to activist approaches and public attacks: Develop a “break glass” plan with draft communications and considerations for decision-making in activist situations, e.g., under what circumstances should the company respond publicly to an activist’s open letter? The plan should include messaging for attacks on the board for shareholder conversations and/or public responses. For example, the company should be prepared to explain how a director’s unique skills and experience allow him or her to make differentiated contributions given the company’s current strategy and priorities. This is particularly important for directors deemed more likely to be activist targets, e.g., due to a relatively long tenure on the board.
• Practice proactive IR and involve directors in shareholder engagement: While strong financial performance is the best defense against activists, effective IR and engagement with large shareholders remain essential for building and maintaining investor support. Importantly, institutional investors increasingly expect access to directors, which boards are more frequently granting: In a 2022 PwC survey of public company directors, 60% of respondents said a member of their board other than their CEO met with shareholders during the prior year, up from 42% in 2017.[7] By showing engaged independent directors and responsiveness to shareholder feedback, including in proxy statements, companies and boards better position themselves for potential activism.
• Enhance director disclosures: The UPC prompted many companies to expand the information they provide about directors and to present it more effectively, especially in proxy statements and on corporate websites. Using these and other mediums, companies should explain directors’ unique contributions and why they matter for the board’s effectiveness.
• Regularly assess board refreshment needs and identify potential independent director candidates: Boards should not wait for activist pressure to discuss refreshment plans or look for potential independent director candidates. Many activists approach companies with possible director nominees in mind, sometimes only weeks before a nomination deadline. Boards that frequently evaluate their needs and that have a few potential director-candidates on their radar are better equipped when engaging with activists, including in settlement discussions.

Armed with thoughtful preparation and a realistic understanding of dissident tactics, directors will be better prepared to deal with activists in a manner that creates value. When evaluating solutions to an activist engagement – such as potential settlement agreements – directors can prioritize the interests of all shareholders, unburdened by exaggerated threats to their personal reputations.

Endnotes

[1] Fairfax, L., Just Sa Just Say Yes? The Fiduciary Duty Implications of Directorial Acquiescence (2021). Faculty

Scholarship at Penn Carey Law. 2381; Bebchuk, L., Brav, A., Jiang, W., Keusch, T., Dancing with Activists (2019). NBER Working Paper 26171, National Bureau of Economic Research, Inc. (noting evidence that incumbents’ reputation concerns are positively related to the relative likelihood of a settlement agreement); Dyck, A. and Zingales, L., The Corporate Governance Role of Media (2002). NBER Working Paper 9309, National Bureau of Economic Research, Inc. (discussing how public image concerns among directors and managers can drive corporate decision-making, including in the context of shareholder activism).

[2] Coffee, J., Jackson, R., Mitts, J. and Bishop, R. Activist Directors and Agency Costs: What Happens When an Activist Director Goes on the Board (2019), Cornell Law Review (104)2.

[3] Institutional Shareholder Services Special Situations Research Note, August 23, 2022.

[4] Galloway, J., (2023). Vanguard-Advised Funds’ Perspective on Contested Elections, Harvard Law School Forum on Corporate Governance, https://corpgov.law.harvard.edu/2023/02/13/vanguard-advised-funds-perspective-on-contested-elections/

[5] Gow, I.D., Sa-Pyung S.S., and Suraj, S., Consequences to Directors of Shareholder Activism (2016). Harvard Business School Working Paper, No. 14-071. (While the authors state that their findings on this topic are fairly consistent with prior research, they note that their findings diverge from those of Fos and Tsoutsoura (2014), which they suggest may be attributed to the latter’s inclusion of directorships on the boards of non-profits and private companies in their dataset).

[6] Equilar data, cited in Baker, A., Larcker, D.F., Tayan, B., and Zaba, D., (2023). The Evolving Battlefronts of Shareholder Activism. Rock Center for Corporate Governance at Stanford University; Working Paper Forthcoming.

[7] PwC, 2022 Annual Corporate Directors Survey, October 2022.