In activism campaigns you have launched against companies that involve a corporate governance element, how well prepared are companies to engage with you on governance issues?
Corporate governance is certainly one factor in considering an activist campaign – more often if there are glaring elements that need to be put forth for debate. Often, at small-cap companies, there are facets of a company’s compensation program that are misaligned with creating shareholder value. It is also debatable whether say on pay is actually effective. When we engage in situations where the incumbent board and management think the status quo is at risk, they often surround themselves with lawyers and advisers who in turn prepare the target companies to engage.
How does governance relate to your focus on financial or operational issues?
Our goal is to make money for our investors, and improving financial and operational issues is usually more effective to re-rating an equity price in the near term. Our goal is also to leave all of our target companies better than prior to our involvement, so altering and improving governance provides a good footing for long-term capital appreciation.
How has your focus on governance changed recently?
We believe an activist shareholder can be effective with a small position in a firm now; that was not previously so. The key is to have facts and data on your side, and to sway fellow shareholders with credible initiatives. Also, while we have also avoided situations with staggered boards in the past, I think promoting change to a minority of a board can be effective in changing the conventional wisdom of the status quo.
Would corporate governance issues alone be enough for you to launch a campaign against a company?
Probably not. We look for multiple drivers of value creation.
In what ways do you think governance impacts stock price?
I have seen some studies that suggest companies with better governance structures trade at higher multiples or perform better than their peers. I think firms with several anti-takeover defenses that serve to entrench the company’s board or management deserve a discount.
What are your top governance issues in 2016?
I think compensation and insider ownership continue to be the top two. As long as there is a divergence in incentives between a company’s fiduciaries and its shareholders, there will always be companies that underperform.
Finally, what do you want in terms of investor relations from the companies that you invest in?
I think equality and access among all shareholders is important. [But] I believe that CEOs and other executives are most effective executing their business plans to create shareholder value rather than spending a substantial amount of time communicating with shareholders.
Read our accompanying article: Shareholder activism meets corporate governance.
This article appeared in the Summer 2016 issue of IR Magazine
