The spectre of hostile shareholder activism is rising once again. But what’s behind the wave of shareholder rebellions and how can issuers manage this activism? Neil Gibbons reports
According to Richard Davies, IR practitioners are at the sharp end of shareholder activism. “They are often the first to note [activists’] presence on the share register, they have to deal with the shareholders’ requests for information and monitor the situation for senior management,” he says. Moreover, he says, identifying activist shareholders can often be difficult due to their use of Contracts for Difference (CFD) positions to hold their stock, with the inherent threat that these derivative positions can be swapped out for real shares at any times.
“The recent changes to the disclosure regime to force investor disclosure of CFD positions of 3% or greater (or as part of a long/CFD mix) has not improved matters greatly,” he says. “Derivative positions cannot yet be interrogated by use of the Companies Act s793 instrument which means that IROs cannot verify the frequent claims by activist investors to hold more shares than may be true.”
TaylorRafferty’s Henson agrees that activists represent a significant IR challenge.
“This shift in the issues will demand a commensurate change in the corporate approach to dissidents and market-facing communications,” he says. “In fact, I would argue that the more sophisticated activists are in their demands and strategies, the more the burden of proof shifts to the corporate target to make the case that it is in the best position to maximise shareholder value.”
As you might expect, there is no one-size-fits-all approach to repelling classic activist strategies. Anne Louise van Lynden van Sandenburg is MD of the Benelux operations of corporate communications agency CitySavvy. Her advice is to keep an eye on share price as this will indicate the level of peril a company is in. She breaks her approach down into three scenarios.
“If your share is structurally undervalued, over a period of months, then you are in alarm phase yellow,” she says. “Ideally, before you’ve reached this stage, you would have close contact with your institutional investors and the analysts who follow you and you should know what their concerns are about your company.
“If your share price is undervalued, and you don’t know why, and your efforts to convince the investment community that you are undervalued don’t seem to be helping, you are in alarm phase orange. At this point, you should be battening down the hatches, in case a storm blows up. Your communication with the investment community should be intensified. You must find out why you are undervalued and formulate a credible plan to address the issues – and more importantly start executing the plan immediately!
“If, despite all this, you receive information that you have an activist shareholder in your shareholder base, then you are in alarm phase red.”
Sounds ominous – but van Lynden van Sandenburg says knowing one’s enemy can be a beneficial first step. “You should first research your investor carefully – not all activist shareholders are bad; some are actually real partners to the management team,” she says. “Find out how your investor has behaved towards other companies and prepare yourself. Hopefully, you will have strengthened your relationship with your investors and can convince them to publicly support your own strategic choices.”
Depending on the style of your activist investor, she adds, you may need to be ready for a major media battle. “Keep in mind that by the time it gets into the media, your company is in a very weak position, and your main goal will be damage control.”
Henson agrees that the primary goal of any corporation will be to avoid a public proxy battle. He believes that a successful defence campaign starts well before a proxy battle is waged, with steady-state IR efforts coupled with a clear and up-to-date picture of a company’s shareholder base. “If the CEO of a company is knocking on the door of its large institutional holders for the first time the day after a proxy campaign has commenced, it’s too late,” he says. “Likewise, a positive history of dealings with influential news outlets will also bode well for a company if and when a campaign is waged in the media, as is the wont of many pure, event driven activists.”
As well as preventative measures, Henson argues that a company should prepare a response strategy that considers the long-term interests of all shareholders alongside the concerns of other stakeholders in the business. “It should pay serious critical attention to shareholder proposals and take into consideration whether or not those proposals have been receiving majority shareholder support in recent proxy seasons.”
It’s important, he says, that the response strategy can be immediately implemented. “This response plan should put the company in the best position to campaign publicly for shareholder support while maintaining business stability and continuity,” he says. “It’s important that any response and campaign remain nimble and flexible while at the same time maintaining message discipline, complying fully with regulatory disclosure rules, and carrying the support of the board and senior management. Rumour control and management is critical.”
Richard Davies, meanwhile, advocates getting the basics right.
“The rule for dealing with shareholder activists is the same as with any other investor,” he says. “Information supplied must be relevant, timely and in-depth – and the process of engagement needs to be appropriately managed.”
His golden rule is that an issuer should never ignore activist shareholders, even if they believe their actions are vexatious.
“Shareholder activists can only get a strong foothold where there is a lack of information to the market or where there are real corporate governance issues that need to be addressed,” he says. “Activists rarely act alone. If other, traditional investors in the company feel the same way as the activists but are not otherwise willing to ‘go over the parapet’ with their concerns, then activists can create problems for the issuer.”
In short, he believes that if an investor relations officer and senior management “are doing their job properly”, they’ll be aware of shareholders’ mood and level of concern. That can be achieved through the use of independent surveys of investor sentiment, and by polling investor feedback.
In following these simple lessons, issuers will hopefully be able to avoid the fate that befell Allied Irish Bank’s chairman, Dermot Gleeson, during a fraught annual meeting in 2009.
Gleeson was pelted with rotten eggs by Dublin pensioner Gary Kehoe who had seen his €20,000 equity stake wither, leaving him to subsist on a state pension and some rental income. “I only brought two eggs,” Kehoe said, “because I couldn’t afford to buy the half dozen.”