Keeping Activist Investors Away

Ways to keep activist investors away include boosting performance, improving capital allocation and strengthening your competitive edge.

Gregory V. Milano

Gregory V. Milano

For those who thought activist investing was a fad that would run its course and fade away, wake up and smell Carl Icahn’s coffee. Shareholder activism is here to stay.

There are more and more activist investors backed by ever-increasing war chests that keep filling up in response to activist success. Pension funds and other investors search high and low for decent returns and many seem convinced that activist investors can deliver the goods.

What drives shareholder activism and its success? Unfortunately, many companies are not run as well as they should be, which allows activists to find companies with performance problems, inadequate valuations and governance troubles. They buy in cheap, apply pressure to move management in a new direction and then seek to sell at a higher valuation.

Frankly, it can be embarrassing for executives that outsiders can be so successful without the benefit of inside information available to management. It should be much easier for management to drive these kinds of successes from the inside.

On top of this, in an environment where the public trust of corporate leaders has faded, activist investors have garnered an almost Robin Hood-like image as combatants of greedy, power hungry CEOs.  Since activists usually own less than 10 percent of the company, the vast majority of any gains they stimulate are realized by other investors, including pension funds which invest on behalf of the masses. Activist activity seems almost altruistic.

Analysis_Bug3The experience is very different from a corporate perspective. Many executives find dealing with activists to be very unpleasant. It is difficult to lead a company toward long-term success while a seemingly naïve outsider acts like a bully with a megaphone and cries out grievances for all to hear. Activists are disruptive, unsettling and downright frustrating.

Activists complain about deteriorating competitive advantages, weak revenue growth, declining profit margins and/or eroding returns on capital. They whine about slumping valuation and poor share-price performance. They often demand for the business to be broken up through spinoffs and divestitures or for it to stop its acquisitions.  And they often insist on massive stock buybacks, sometimes funded by taking on heavy levels of debt.

2 thoughts on “Keeping Activist Investors Away

  1. “Unfortunately, many companies are not run as well as they should be, which allows activists to find companies with performance problems, inadequate valuations and governance troubles.”

    ” It should be much easier for management to drive these kinds of successes from the inside.”

    “Activists complain about deteriorating competitive advantages, weak revenue growth, declining profit margins and/or eroding returns on capital.”

    “To keep activists away, you must be your own activist!”

    “To successfully serve as your own activist, you must objectively assess your company’s strengths and weaknesses and diligently pursue improvement opportunities.”

    Most large corporations and conglomerates realize that centralized command and control is both unwieldy and undesirable because it cripples organizations’ ability to respond quickly to a changing environment and to make fast and effective decisions.

    With better tools and data, large corporations can better understand their workforce to align their corporate culture and subcultures at every level of the organization with their goals and strategy to drive innovation and improve performance.

    Businesses succeed at the intersection of employees, customers and suppliers. Regardless of the size of the organization, there are ten (10) common process steps to strategy execution:

    Step 1: Visualize the strategy.
    Step 2: Communicate strategy.
    Step 3: Identify strategic projects.
    Step 4: Align projects with strategy.
    Step 5: Align individual roles and provide incentives.
    Step 6: Manage projects.
    Step 7: Make decisions aligned with strategy.
    Step 8: Measure the strategy.
    Step 9: Report progress.
    Step 10: Reward performance.

    Large corporations and conglomerates have ended up with multiple sources of policy, training, surveys, assessments and issue reporting hotlines, including:

    1) Internal and external data analytics
    2) Effective policy management (utilizing an online policy library)
    3) Ongoing culture assessment surveys
    4) Performance Scorecards (hard & soft metrics)
    5) Event management and reporting
    6) Annual certifications to the Code of Conduct

    With better tools and data, leadership can acquire the actionable intelligence they need to implement and maintain an innovative, high performance culture by aligning individual roles at every level of the organization with corporate goals and strategy to drive innovation and improve performance.

    The challenge for leadership is to design and implement a framework for making event-based decisions in a timely manner. There are more great business ideas out there than great businesses. The difference is in the people, the execution and the timing.

    For the sake of investors, employees, customers and suppliers – ” be your own activist!”

  2. Pre-requisite to all steps above:
    Be diligent in understanding the condition of fixed assets, people, and practices within your company from bottom up, integrated with the top down view. Top down assessments fatigue before they get to the real details. Activists never do.

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