Ten Ways to Defuse Shareholder Activists

The Web allows aggressive investors to build powerful campaigns against management. Here's how to deal with them.

Today’s new breed of activist investor uses modern methods to put corporate leaders in the crosshairs: blogs on the Internet, wikis, and video that helps them create what corporate communications firm Brunswick Group calls “a wolfpack mentality.” And to help executives understand and counter the latest challenges, Brunswick has designed a sort of counter-activism handbook.

Brunswick — which calculates that there have been 102 activist campaigns so far in 2007, up from 99 in all of last year and just 55 in 2005 — is joining a growing crowd in raising cautions about activism. A National Investor Relations Institute survey, for example, found that 47 percent of companies queried saw activists take an aggressive position on their stock this year. Others have pointed to how the Securities and Exchange Commission’s new e-proxy and shareholder access regulations now make proxy wars easier and cheaper to wage.

But companies under attack by the powers of digital communication can use some of those same tools to challenge them. “You need to know who your shareholder base is and be engaging with them,” says Steve Lipin, a senior partner with Brunswick. When looking at the universe of company stockholding, he adds, “the activists might have 10 percent, but it’s the rest that matter.”

Brunswick notes certain activist “triggers”: issues both operational and financial “that can stoke investor ire and potential activism.” The triggers include corporate performance that lags the company’s peer group, ineffective deployment of capital and value creation, high-price acquisitions, executive compensation out of line with corporate performance, and — an important one for some vocal shareholders — a “denial of the right to be heard.”

Against that backdrop, Brunswick offers the following 10 tips for countering investor activism:

— Articulate operational and financial milestones that Wall Street can use to monitor progress.

— Provide simple, straightforward disclosure about executive compensation, showing its alignment with operational objectives, financial goals and, ultimately, shareholder interests.

— Be aware of the impact a company’s corporate governance and labor practices has on reputation.

— Thoroughly assess your own shareholder base, and study past campaigns of any activist shareholders to learn their allies and their track records.

— Rethink how you plan to use the Internet to communicate with different segments of your shareholder base in the age of the e-proxy, especially in terms of annual meetings and proxy campaigns.

— Don’t underestimate the importance of regular investor audits to uncover any communications issues or signs of investor uneasiness with management and the company.

— Don’t rely on the “sell-side” to tell your story or provide intelligence on your shareholder base. While they can be helpful, it’s investors who own your stock.

— Don’t brush off irate shareholders or automatically turn down any shareholder’s request to meet with board members.

— Don’t fear engaging in dialogue with hedge funds; they have their ear to the ground on Wall Street sentiment and sometimes are long-term holders themselves.

— Don’t underestimate the importance of communicating and engaging such stakeholders as third-party supporters, customers, and employees; their impact on the outcome of a contested proxy vote — and on corporate reputation — are vital.

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