BoardroomDirect®
Update on the current board issues: June 2014

June 2014
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BoardroomDirect®<br><span>Update on the current board issues: June 2014</span>

At a glance

Directors for public companies of all sizes are spending time in their boardrooms discussing one particular class of shareholders: activists.

Issue in focus

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Activist shareholders have the board’s attention

Directors for public companies of all sizes are spending time in their boardrooms discussing one particular class of shareholders: activists.

What is the current view of activist shareholders, including certain hedge funds?

In many cases, activist hedge funds deliver steady returns, produce sophisticated plans to improve value, have effective messaging, and can have a big impact with relatively low investment. In addition, they are more accepted in the marketplace. This was the view from a March 2014 PwC Deals practice webcast.

“One of the key points is that the activist hedge funds are outperforming the market,” Ron Chopoorian, a PwC Deals partner, said. “There’s also been a fundamental shift in the sentiment about activists.

They are no longer seen as corporate raiders; they are seen pushing for shareholder value.” Some evidence of that acceptance by the marketplace is that pension funds and endowments committed $7 billion to activist funds in 2013, according to PwC.

Directors should consider what information is available about such activist shareholders. “I have seen a major transformation that has gone on with directors when it comes to understanding who these [activist] shareholders are,” said William McCracken, a director at MDU Resources Group. “I think we need to know the same thing about activist shareholders as they know about our companies, such as their strategy, how they incentivize their executives and what they are paying them.”

What makes a company a potential target?

While understanding activist shareholders is important, it is even more important to assess whether your company is a possible target. According to Henri Leveque, US Capital Markets and Accounting Advisory Leader, the criteria activists use are varied.

“Anybody can be a target,” Leveque said. “It’s not a company size issue or an industry issue. What we generally see is that they [the activist shareholder] will look at management’s inability or lack of desire to address issues that are quite obvious to the marketplace.”

During the webcast, Leveque pointed to a list of criteria that activists frequently use to determine if a company will be a target:

  • Poor market performance against peers
  • Poor financial performance against peers
  • Lack of new products or innovation (propensity to update existing products rather than bring new products to market)
  • Suboptimal capital structure
  • Turnover in leadership
  • Lack of transparency and communication

What should you do if your company is targeted by an activist?

Professor Thomas Lys, the Eric L. Kohler Chair in Accounting at the Kellogg School of Management at Northwestern University, stresses that the first thing to do is understand the changes the activists want. “The first thing is to understand their strategies,” Lys said. “Then you need to determine if there is some truth to what the activists imply.”

He pointed out that in his experience many activists don’t want to be on the board of the company they are pursuing. “They view that as a matter of last resort because once they are on the board their hands are tied,” he said.

They would rather force the company to make the changes they seek, whether they are financial (pressing a company with a lot of cash on hand to issue a dividend) or operational (trying to replace the sitting CEO).

What can a company do to be ready for an activist?

Leveque suggests the following:

  • Have a clear strategy. To be successful, you must develop and implement a clear strategy that addresses how to create value for customers and aligns the company’s strategic direction with its capabilities.
  • Take on a proactive portfolio assessment and optimization. Embed in your business processes a way to view your business through the investors’ eyes. You can take such proactive measures as leveraging business intelligence, fixing underperforming businesses or identifying acquisitions.
  • Have a shareholder engagement strategy. It is critical to communicate with the market and respond to shareholder questions. You should be transparent. This includes having a script prepared for inbound shareholder calls and, working with corporate counsel, communicating directly with activists in a timely fashion.

For more information and guidance about activist shareholders, read PwC Investor Resource Institute’s Heard at the forum: Five provocative things.