Audit Committee Leadership Network, April 2014
On March 19, 2014, members of the Audit Committee Leadership Network (ACLN) met in New York to discuss investor activism, in particular the activism focused on company performance and shareholder value (as opposed to political or social causes). In this session, members were joined by Andy Merrill, senior managing director at Teneo Strategy. Members also discussed the topic with G. Mason Morfit, an activist investor with ValueAct Capital who recently joined the board of Microsoft, in a complementary session over dinner on March 18.
In their conversations with Mr. Merrill and Mr. Morfit, ACLN members touched on four topics:
Today’s activist investors
Activists today are more numerous and well funded than in the past, and their activities are drawing more media interest. They are targeting larger companies, and they are receiving more support from institutional investors, allowing them to exert influence even when their positions in a company are relatively small. While the old brand of confrontational activism has not disappeared, a new brand of collaborative activism focused on long-term performance has emerged. Recent empirical studies suggest that activists can have a positive influence on long-term operating performance and stock returns.
Preparing for an activist challenge
Mr. Merrill and ACLN members emphasized that companies should prepare for an activist’s approach in advance. Companies should assess and address the vulnerabilities that might spark an activist’s interest, such as poor operational performance or shareholder returns, and they should have a plan ready for implementation if an activist approaches. An ongoing effort to build strong relationships with the company’s major investors is critical. Understanding legal defenses such as shareholder rights plans (poison pills) is also advisable.
Responding to an activist challenge
If an activist approaches the company, Mr. Merrill and the members agreed, the first step should be to engage with the activist, listening to his or her arguments with an open mind. The activist’s ideas may be constructive, and a dialogue could lead to a mutually acceptable plan for addressing the activist’s concerns and recommendations. Only after exhausting efforts to reach an amicable agreement should a company fight back against an activist, and legal defenses such as poison pills used as a last resort.
Working with an activist board member
Mr. Morfit argued that an activist investor can bring valuable knowledge and perspectives to a board. Members agreed, but they said that it is important for an activist board member to build trust and mitigate concerns about representing all the investors. They also noted that the realities of serving on a board and managing exposure to insider information could prompt an activist investor to decide on the appointment of an independent, mutually agreed board member instead.