Last year was one of the busiest of the decade for proxy fights and activist actions. If issuers are supposed to be more aware of the activist threat and more engaged with shareholders the question is: why the uptick?
 Wes Hall, founder and chief executive of Kingsdale Shareholder Services |
The reality is that activists are innovating at a pace issuers can’t keep up with. Activists are getting smarter as the asset class attracts superior talent and many are willing to hold their positions for longer periods of time. This means activists are no longer a time-bound crisis to manage: they are shareholders to engage. In our experience it is the IROs who represent the first line of defense in this evolving battle and who need to be more prepared than ever in 2016.
This new breed of activists think of themselves as ‘constructivists’, players that are willing to sit down and talk privately, avoid making news and work collaboratively on ideas that are no longer simply limited to the balance sheet and the board but also consider improvements that require the help of management to make happen. A growing number of their fellow shareholders are coming to see these activists as ‘free investment bankers’, doing work the company can’t do and gathering insights other shareholders can’t – having conversations with competitors, alumni, customers, and so on. Whereas independent management consultants have nothing to lose if their strategies prove unsuccessful, constructivists actually have skin in the game.
IR professionals need to be aware that activists are no longer working alone and it’s no longer a ‘taint’ to work with them. Institutional investors have become increasingly willing to help support activist actions, with growing formal and informal communications between them. It’s not uncommon for the more conservative, long-term funds to quietly call an activist and say, ‘I like what you did with my investment over here. I have another one you might be interested in…’ It is important, therefore, to understand not only who your shareholders are, but also their investment philosophies and their propensity to support activist actions in the rest of their portfolio.
We regularly make the point that directors need to engage shareholders by improving communications and keeping them informed. As many IR professionals have discovered, however, this point still isn’t resonating with directors. We are rapidly approaching a tipping point where shareholders that are not getting the access and information they expect will soon hold boards accountable. Many of the issues we saw in 2015, including lack of support for say on pay and preference for short-term fixes at the expense of long-term strategy, are related to boards’ inability or unwillingness to communicate. But how can this be resolved?
A good start would be to have directors attend an investor day to meet with shareholders or, as part of the annual outreach a CEO does with the IR team, have a handful of independent directors join them. It is important to ensure this engagement is meaningful from a shareholder perspective, making sure you are talking with and not at shareholders. This year directors must open and strengthen lines of communication with their shareholders – before the new breed of activists does.
Wes Hall is founder and chief executive of Kingsdale Shareholder Services
This article appeared in the Spring 2016 issue of IR Magazine
