Confronting shareholder activism: Effective strategies in investor relations
Being targeted by an activist shareholder can be highly disruptive and unsettling for a CEO. Your strategy and vision are undermined—possibly mocked—and you face losing control of your company. With shareholder activism rebounding to pre-pandemic levels, more than ever, companies must be prepared, and your investor relations (IR) function is essential.
Investment capital has become less patient. Activists frequently set their sights on issuers that have experienced prolonged underperformance, hold substantial cash reserves, or have a well-established business segment that could be spun off to unlock shareholder value.
At NATIONAL, in our work with companies facing activist campaigns, we observe three distinct types of activists:
- Current shareholders that are unhappy with the company’s performance, its board and management team, or its expressed strategy.
- Activist funds that initially acquire a position in a company and subsequently launch a campaign to secure a board seat, aiming to direct the company toward their own agenda.
- “Short and distort” activists whose intent is to increase negative sentiment to serve their short-selling strategy. This involves issuing a report that exaggerates issues or even lies about a company to drive down its share price.
These scenarios are difficult to avoid and can arise in any company. Underperformance can lead to the first two scenarios, while a company with a well-performing stock may attract activists who introduce a negative narrative.
Being prepared to address activism comes down to the crucial role of maintaining transparent investor communications, keeping in touch with your largest shareholders, and ensuring your board is aligned with management and meets current corporate governance standards.
Your investor relations function
At its core, your IR department is tasked with providing an accurate overview of your company’s activities. As a first step, you should assess how activist-proof they are.
Key factors to consider include:
- Is your business strategy adequate? Does it effectively address current market conditions, and have you adequately communicated it to your stakeholders, while also gathering their feedback?
- What is your merger and acquisition (M&A) track record? Have you overpaid for a recent acquisition or missed opportunities where the market expected you to act?
- Is your board aligned with your investors? Consider that some activists target companies with “crony boards”—long-serving directors connected across multiple companies. Activists often cite directors’ lack of share ownership as justification for a campaign.
- Do your executive compensation practices align with your company’s business goals and recent performance?
- How often do you speak to your shareholders, particularly large holders? Have you recently conducted a perception audit?
- Do you frequently engage with financial journalists who cover your industry? Do you have allies in the media to support you when your corporate reputation is at risk?
Have a response plan
Facing an activist campaign can be costly for management, both in direct expenses and in the significant time and attention diverted from running your business. Having a clear activist response plan is, therefore, essential.
Although you may not welcome activist scrutiny, if you respond combatively, you risk giving the impression that your management and board are not attuned to shareholder concerns. Keep in mind that most activists contact the board and management before taking their case to the public, so engaging with them seriously can save time and trouble.
Showing humility and acknowledging valid points can be beneficial. While you may be taken aback by suggestions that you are not doing all you can to ensure your company’s full value is reflected in its share price, being open to addressing shareholder activists—even adopting some of their recommendations—can ultimately strengthen your company.
Think like an activist. Monitoring investor sentiment can help detect potential activist campaigns before they materialize. Your investor relations team, senior management, and the board should maintain an ongoing dialogue with shareholders and financial analysts to foster mutual understanding and trust.
You should identify any skill gaps at the board level and recruit qualified directors to enhance your board’s composition.
A well-honed investor relations function should involve open communication and constructive dialogue with both long-term and shorter-term focused investors, as well as the financial community, on an ongoing basis.
What are investors’ concerns? What are their suggestions? Get to know your shareholders: Are they buying, selling or holding for the long term? Have they been involved in activist campaigns targeting other companies?
Be proactive. Explain the vision behind your business plan. You must tell a compelling story of how you will create value through growth. Your messaging can be adapted to changing circumstances.
Your story can be shared through direct shareholder communication, social media channels, and earned media from proactive outreach to journalists. A well-devised communications plan is essential for these storytelling efforts. Also, a well-informed investor, particularly at the retail level, is more likely to resist a “short and distort” campaign.
In the face of activism
Have you identified the members of your response team?
Do you have a digital advocacy plan to counter misinformation being spread by an activist?
Have you conducted a simulation for your executives and board on how they would deal with a potential activist campaign?
The best defence against activist attacks is to convince investors that management is pursuing the optimal path to value creation. If investors believe your stock is, or will soon be, fully valued, professional activists will find fewer opportunities to instigate change.
Are activist investors targeting your company? Our Capital Markets and Corporate Communications teams are ready to help organizations effectively communicate with their shareholders and other important stakeholders.