The activism landscape is as complex as today’s business environment, where constant competition and the need for growth is creating unique and emerging opportunities and risks for activists and companies. The threat of an activist investor may loom over any company, even the ones that feel assured there is no risk.
Who really benefits?
Activists may have new, potentially useful and beneficial ideas about a company, but they often have a shorter-term focus than the board and management. Short-term improvements can distract focus and force companies to re-evaluate their plans, which could lead to companies underperforming after the activist pulls out.
Well-run companies should already be acting in the best interest of shareholders in pursuing their business strategy. An activist situation can lead to costly disruptions and, if an activist pursues some of the more attention-grabbing methods, can attract public scrutiny leading to pressure on the board to respond and act faster, at the expense of long-term strategy and performance.
Is it a level playing field?
In an era where information exchanges happen instantly and live online forever, companies are at a disadvantage. Currently, activists can:
- Quietly amass a holding in the company
- Do research behind the scenes
- Engage with disgruntled employees
- Launch a well thought out campaign without notice, putting the company on its heels
Responding to an activist campaign can be expensive, and reputational damage can be difficult to undo. To avoid being caught unaware, companies may want to consider carefully examining vulnerabilities as compared to their peers and proactively address areas that are at risk. They can be proactive by having an entire communications plan ready but try to avoid using it by defusing the issue first.
How many board seats does an activist need to affect change?
In many cases, activists can affect change with just one board seat. There will be a whole organization and support network behind that one board member, who will be highly prepared and ready to promote an agenda. Sometimes, a board seat is not even necessary; the threat of activism alone is sometimes enough to drive change. Activists have different personalities, resources, strategies and campaigns, but any of them can have an impact so companies would be wise to treat them all with respect.
Fight or settle?
In most cases, the best strategy is to fix the issue within the context of the company’s long-term plan and vision. Changing the company strategy or plan to achieve a quick settlement could create a more difficult situation down the road. Short-term financial performance targets as part of a settlement create risk if targets are missed or they damage the company in some way.
Any company could be an activist target. The best outcomes are reached when companies are prepared and engage with investors early and often.
If you have questions about shareholder activism, contact your Relationship Manager who can connect you with one of our Georgeson experts.
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