When an Activist Investor Invests

At a recent invite only event they invited me to a discussion on Activist shareholders with speakers from CEO who has been twice in Executive Management when Activist Investors became shareholders and an Activist Investor. Discussion focused on how to react to the Activist Investor and a small part on what to do to prevent the interest of an Activist Investor.

What is an Activist Investor?

Activist Investors are those who seek companies they can extract value by selling the Company, Break the Company up or Block a Transaction the Company wanted to do. The Activist Investor has done a deep dive into the Company, use of capital and strategy as a team of management consultants. They will have reached out to Subject Matter Experts to discuss that Company’s positioning (disclosure I am asked to be such an expert from time to time on a non-conflict of interest basis). Next, they evaluate an alternative strategy and the potential returns. Then take a minority shareholding.

What to do when an Activist Investor joins your shareholder register?

The Company’s Board Chair and Executive Management will have received a letter from the Activist Investor outlining their alternative strategy and what the Company should do. Also, this letter is sent to the media. Focus is now on the C-Suite and the merits of the Activists letter are being discussed in the Media. Media, shareholders, and stakeholders will now look for the Company’s response.

Business needs to keep running so choose the key persons to engage with the Activist shareholder and realign tasks and responsibilities to allow business continuation. Reaction should not be emotional and the response professional.

One positive from the Activists involvement is that they are providing free management consultancy advice to the Company. The new value creating ideas raised will need careful consideration by the Board. In the ensuring media cycle, be more positive and de-escalate the media circus as there is no need to respond to each public communication from the Activist. Meet the new Activist shareholder to hear their ideas in full.

The Company can develop and communicate an alternative company strategy to shareholders and stakeholders. The Board should compare the two strategies and select the strategy that is in the best interests of the Company (in some jurisdictions) or shareholders (in others).

How to prevent an Activist Investor from selecting you as a Target?

Non-Executives on the Board should be the resident Activists challenging the Executive Management in good times and supporting during bad times. Creating, challenging and executing the best strategy. Communicating with shareholders and stakeholders are is essential.

A solid partnership existing between Board Chair and CEO (see my article on Tandem Leadership) should lead the Company. The Non-Executives as the Activists in place should reduce “agency” problems and their inputs into strategy and board matters enhancing shareholders returns.

Communicate with the largest shareholders (within the restrictions that might in place by local Securities Law) so they can challenge and engage with the Company. Doing the same with the other stakeholders such as employee representatives, Industry regulators or local councils/communities where Company facilities are located will create an engaging and dynamic image of the Company with those it should have a two-way dialogue with.

This article may read as only useful for Listed Companies however, the ideas and actions to prevent are healthy for a closely held company. The ideas and actions are not exhaustive, and you may find others that are useful. Please add them in the comments or let me know.