How to Defend against Activist Shareholders

Experts: "the Best Approach for Dealing with Activist Shareholders lie in Attitude and Preparation"

As the number of companies targeted by Activists grows, Boards and Management begin effective preparation before becoming a target.

A recent event hosted by the Deal in London attracted a sold-out audience and global leaders to confront what Activism will mean in 2019.

You need only to glance at the headlines of the Financial Times or the Economist to recognize the large increase in Activist Investor targets in Europe. The question is, how do you prepare for an Activist campaign?

The experts maintain that while American companies are more attuned to response, in Europe this is a new phenomenon. What can you do about it?

The first step is prevention: make sure you are not a target. The Board and Management need to work together to ensure:

1. The path for value creation is clear
2. The assets of the company make sense, and belong together from an investor point of view
3. Management is using Investor Relations as a Strategic Lever
4. Investors, Customers, Suppliers, and Employees all recognize that Management is an advantage and not an impediment
5. Management knows the customers and the business better than an Activist investor

The key to this is your Strategy. One leading Activist Investor states that "65% of the discussion is about Strategy" 

Forbes has noted in their 2017 study that when the CEO and Management talk about Strategy, 70% of the company do not understand what they mean. It is the failure to execute on a logical strategy that will attract the activist investor and make your firm a target.

Strategy needs to start with the Board and Management. A good board will challenge management on the company strategy, and together the groups can form a formidable direction for your company that can beat the competition and take advantage of emerging trends. For this high quality product to emerge, you need to have a structured process for developing, and evolving your strategy.

While today many strategies depend on M&A, consider that 40% of Activism activity in 2018 involved blocking M&A. Recent high-profile share price corrections such as the Heinz Kraft upset in February 2019 underscore the importance of considering acquisitions and the real value creation before executing on the deal.

Consider what happened with Kraft Heinz: A vanity M&A project destroyed Billions in Value. Image Credit: CB Insights, 2019

A further important consideration relates to ESG:

The Environmental, Social, and Governance ratings are shifting, and there are active ESG funds targeting companies with low Fitch ESG Ratings. This is a major challenge in Global Business, and an important consideration for both your CEO and Board. Both customers and investors have now clearlycommunicated it is not acceptable for companies to misbehave in the quest for lowest product costs. This means you need to audit your supply chain, and business practices globally. A bad decision builds a lack of trust and is more than just a business problem: it will taint your firm and the desirability for top employees to want to work for you.

To summarize, the best prevention defence you can build against activist Shareholders relates to your attitude, and Strategy:

1. Understand where your market is headed

2. Develop and Execute on a Strategy that emphasizes long term value creation. Avoid Vanity M&A.

3. Communicate your Strategy, leveraging Investor Relations as a tool in your arsenal

4. View and use your Board as a key competitive advantage in decision making

5. Build Trust and be known as one of the top firms for ESG