They wax eloquently about governance problems like board cronyism and seem to almost enjoy shouting about what they see as undeserved executive pay. Pity the CEO’s children who get teased and tormented at school because their parent is condemned on TV for making millions in supposedly undeserved salary, bonuses and stock options.
The threat of an activist appearing in your investor register is very real. If you lead a public company in the United States, it is guaranteed activists have already evaluated you and your company. If they don’t take action now, they will nonetheless regularly reevaluate your company to see if it fits their targeted profile. Who would have thought Apple, the third-best performing stock in the S&P 500 over the last 10 years, would attract an activist?
Some executives and directors lose their jobs at the hands of activists. Some companies are broken up into pieces. Some carry out massive restructurings replete with thousands of layoffs and other cost cutting. It all seems so threatening and distracting.
But it doesn’t have to be. As in sports, when dealing with activist investors, the best defense is a good offense. To keep activists away, you must be your own activist!
There is plenty an executive team can do to keep activist investors looking elsewhere, but it requires letting go of some often deep-seated beliefs. Executives must not view the company as theirs, but as the property of the company’s shareholders. Shareholders are often silent partners. But remember that any investor can become vocal and exert influence as he or she desires.
If management is truly committed to serving shareholders, it should evaluate the business the way activists already do and take decisive action to unlock value before activists barge in and force management’s hand. Being proactive gives management the opportunity to do it right since they know the company best.
There are five main areas in which management should take steps to keep activist investors away:
1. Improve Performance: Are revenue growth, profit margins and returns on capital adequate in each major business area? Are there opportunities for improvement? Seek to better utilize all unutilized capacity, since this can drag down returns on capital. Reduce bureaucracy that adds cost, complicates decision making and breaks down accountability. Discontinue all activities that don’t earn adequate returns because these are magnets for activist investors.
2. Allocate Capital Better: Do you have the right balance between organic investment, acquisitive investment, dividends and buybacks? Are investments made in the right areas? Do you invest more where returns and growth opportunities are high, and vice versa? Activists frequently target companies that allocate capital poorly.
3. Strengthen Competitive Advantages: Are your competitive advantages adequate to support growth and sustainability? Do you invest enough in research and development? Brand-building marketing? Employee training? Weakening competitive advantages cause low valuations and can be an invitation to activist investors.