Keeping Activist Investors Away

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

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.

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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