Lead Director Network, April 2014
On March 4, 2014, Lead Director Network (LDN)1 members met in New York City to discuss shareholder activism. Ralph Whitworth, founder, principal, and investment committee member of Relational Investors and non-executive chairman at Hewlett-Packard, joined members for dinner to provide an activist’s perspective. Members were also joined by King & Spalding corporate partner Bill Baxley during the meeting.
This ViewPoints synthesizes member discussion on four key topics relating to shareholder activism:
A new era of activist investing
Lead directors shared their views on the evolution of activist investing. While companies and boards once viewed activist investors in a negative light, lead directors now recognize that in some instances activists can bring positive change to companies. This is consistent with evidence of trends in shareholder activism that demonstrate both an increase in activist activity at large public companies and a more widespread acceptance by institutional investors of activist tactics.
Preparing for activist interest
Lead directors discussed the need for companies to assess the financial and strategic vulnerabilities that could lead to an activist approach. This assessment often includes both a critical review of a company’s performance and position in the marketplace and a proactive approach to addressing potential issues that may trigger activist interest. Members stressed the importance of putting a plan in place for dealing with an activist while understanding that, as one member said, “It is never going to go exactly as you expect.”
Negotiating with activist investors
When an activist does approach a company, it is important to understand the activist’s agenda as early in the process as possible. Lead directors also noted the importance of taking today’s activists seriously. One member explained that by the time an activist discloses an investment, “They have done real research and have serious views.” Whether or not a board director is personally involved in the negotiations with an activist, LDN members underscored the need for the company to present a unified response.
Working with an activist investor on the board
Members discussed instances where they worked closely with activist investors to improve company performance, including situations where an activist joined the board. In many cases, members had positive experiences when both the board and the activist were open-minded about the relationship and guidelines on behavior, such as confidentiality, had been agreed in advance. Members also discussed the role of the lead director in maintaining a frank and candid environment when an activist or an activist’s nominee joins a board.