Boards that find themselves in the crosshairs of a shareholder activist spend inordinate amounts of time and money developing a defensive strategy and putting it into play. Yet, by the time a shareholder activist comes knocking, it may already be too late. Savvy boards get ahead of the game by proactively identifying and addressing issues they might have to confront in an activist scenario long before an activist is even in sight. And there’s no better forum for this exercise than the an- nual board strategy offsite. After all, strategy is typically the crux of an activist argument.
Bringing in one of your largest shareholders or an analyst who covers your stock to speak at your strategy offsite can be illuminating—especially if the analyst is one whom you don’t necessarily agree with. Needless to say, legal counsel should brief the board on Reg FD requirements in advance, but the objective here is primarily for the board to listen rather than argue over points they find contentious. The overarching goal is to help the board better understand and potentially navigate market perspectives and concerns about the company, even if they would dispute these points of view.
Long before a shareholder activist mounts an attack, the firm will develop a white paper outlining its position on what needs to change within the company to unlock greater shareholder value. So why not create your own “white paper” through the activist lens and talk about how you’d deal with it if attacked? The purpose of this exercise is to alert the board to areas of vulnerability and provide a forum to proactively discuss how the board and management would respond. Boards that have used this approach typically retain an outside party to step into the role of a shareholder activist—and task them to develop a white paper taking aim at the company. It’s sent out as pre-reading for the strategy offsite and at least half a day is devoted to discussing how to respond—and what steps if any should be taken now to shore up areas of potential concern.
Company performance, not governance, typically drives shareholder activism. But once an activist has launched an attack, governance issues immediately come into play. They are nearly always used as a rallying cry as the activist seeks to build a platform of support, particularly among institutional investors.
Board composition is often at the centre of these arguments. Long-tenured directors, over-boarded directors, a lack of industry expertise and the calling out of a board member whose background seems incongruent with the company’s core business (such as the Broadway producer who sat on the board of Lehman Brothers) can all become lightning rods in the activist arsenal. And it would be a mistake to overlook these issues when identifying vulnerabilities. While this can yield a rather awkward conversation, reviewing this issue proactively—and knowing where the minefields lie—is far better than being caught off guard and left to offer excuses during the heat of an activist battle.
This is not to suggest, by the way, that long-tenured directors who may have an unconventional background need immediately leave the board—particularly if they are some of the best contributors in board discussions and decision-making. The purpose here is simply to understand where board composition could be critiqued and determine whether and if to address it in board succession planning.
A board benchmarking exercise—comparing board composition relative to industry peers—can enhance this review. So can a truly robust board evaluation process that eliminates survey forms and opts instead for confidential interviews with both directors and senior executives with open-ended questions such as, “If we were to add one new director to our board, what skills or expertise would be most useful to bring to the table?” rather than closed-ended ones with yes/no answers such as, “Is our board composition appropriate?”
When it comes to shareholder activism in today’s boardroom environment, forewarned is forearmed. Using your board offsite as a boot camp to identify and address areas of potential activist vulnerability can be an important investment in preparing the board and management to handle any such threats—and to get out ahead of them by making appropriate changes in advance rather than in response.
I would like to thank James Rossman, managing director and head of corporate preparedness at Lazard (New York) for his insights and contributions to this column.
Beverly Behan is a New York-based board consultant who has worked with more than 100 boards of directors in the U.S., Canada and internationally in the past 17 years. E-mail: email@example.com.