Is Your Board Ready to Meet the Activist Investor?

The Board of Directors’ main role, or its raison d'être, is to ensure that the company has a robust strategy, and that it has the right management in place to execute that strategy to deliver the company’s goals (to create value).

The Activist Investor (AI), on the other hand, is the one who sees the gaps in the enterprise’s strategy and execution, and proposes to correct those anomalies to ensure that the company delivers value and that there is no value leakage, due to lack of a robust strategy or the right mix of management.

The AI has a role to play in capital markets as the discrete participants in the market place cannot always work in concert to guarantee that the company is firing on all cylinders (of course it’s apt for opportunism!). The AI then takes it upon itself to ensure that the company aligns the linkages for value creation. AI, like the arbitrageur, can perform this important function using available tools. There are instances, though, where the AI will get it wrong. The company may already be working on the gaps; the Board might have already considered AI’s suggestions (unbeknownst to AI) and deemed them less valuable than thought by the market including AI; and that this knowledge might not be in the public domain for securities’ regulations purposes. Hence, through its actions, the AI can destroy value in the long-run instead. Albeit the buzz of AI’s presence has some-short gains as they often echo investors’ sentiments.

We met with senior members of a New York-domiciled company sometime back. After hearing their strategy and listening to the leaders about how they intended to execute that strategy, we came away believing that it would not be long before an AI came along. Indeed, Elliott Management has already performed that role for the shareholders of that company, and perhaps, for the employees and other stakeholders as well.

The questions that keep coming to mind are that why these breakdowns and what can be done about them. The Board would be ready to meet the AI by focusing on the following actions:

1)   While the overall Board has the responsibility to craft a robust strategy for the enterprise, assigning a Strategy Director whose remit is to coordinate this function will ensure that the Board is aware of its responsibility and has a member in place to hold it accountable for this all-important action. This Director can be the Chairman, the Lead Director, CEO or CFO (where applicable) but it needs to be someone who has the wherewithal for the function. But be mindful that this may not achieve the intended purpose in jurisdictions where the CEO is also the Chairman of the Board, for the fact that the CEO has other important, perhaps pressing commitments that would compete with performing this role. This Director must be someone who can work effectively with all members of the Board, and even with the senior management of the enterprise.

2)   At the annual planning session, where business plans and budgets are presented for approval, the Board, perhaps through its Strategy Director should ensure that the business plan has been “stress tested” in multiple scenarios to capture all possible value creation parameters. A thorough business review must be conducted with all members of the senior management team and the Board. I once co-led such an exercise, with the management of a mid-west energy company (the exercise brought alignment to the management team as they had different notions of certain strategic intents), which has led to a substantial growth path for that enterprise, and created the platform to get the company ready “to meet with the Activist Investor.” The Board and senior management should be clear about what is possible and doable, with value creation in mind after reviewing all strategic options.

3)   During the year, these stress tests can be revisited after incorporating new information from the securities’ markets and the company’s ecosystem. The plan must be dynamic and cannot be reviewed only quarterly. This Director should have mechanisms in place to update the strategy and stress test it from subsequent inputs as events unfold. If the company has a strategy department, the director should be working closely with that organization.

4)   The Strategy Director needs to dialogue with investors (and indeed all stakeholders) and relay concerns and comments to the Board for a richer discussion at such reviews. This Director must be at the investor day, which the company puts together for investors; in addition to reading analysts’ reports on a regular basis to listen first hand to investors’ comments and concerns, so that they can be considered in the strategic reviews. This dialogue will also assist the investment community to get ideas about what has been considered or is being considered by the enterprise.

If the Board performs its role of ensuring that a robust strategy, which has been stress tested, is in place and that it has the right mix of management to execute that strategy, it will always be ready to meet with the Activist Investor (securities’ regulations permitting). The Strategy Director should take the lead for this function, considering all the company’s options to create maximum value.