Activist investors, especially hedge funds, have an obsession with corporate boards. More and more, they say they want a seat at the board table, for themselves or their representatives. So now a big part of the job of corporate secretaries, executives and sitting directors is managing this interest.
Activists looking for attention
Over the last year, Richard Grubaugh, senior vice president at DF King, says he has seen nominees put forward at a large number of companies. Few slates actually go to proxy fights, but hedge funds and activists are nominating them because they are perhaps the ‘greatest tool at their disposal’ to get attention, he says. ‘They do create an engagement at a different level than is normal.’
Emily McNeal, an investment banker with UBS Securities, agrees that activists are using the nominee process perhaps not so much for an actual seat, but as a way to get noticed. Indeed, many investors drop their requests for board slots after getting the sense that their points about the direction of the company are being heard. ‘They’re just looking for a dialogue,’ she says. ‘They kind of just want to start the dialogue and understand the board is open to suggestions.’
If shareholders do get a sense that the board is engaged, they may be less likely to rebel. ‘Activism comes from frustration that the company isn’t doing enough,’ McNeal explains.
Investors may also want engagement simply as a way to get a read on the board’s competence. On a National Directors Institute panel on institutional shareholder and hedge fund relations, speakers raised the criticisms of boards that they don’t work hard to get their own sources of information about a company. Panelists suggested that directors need more balance around management stories and can get this by inviting in investment bankers, governance counsel, M&A counsel and other advisers yearly, if not more often, for their view of how the company is positioned in the marketplace, its strategic alternatives and where it is vulnerable to activists who may see unrealized value.
Hedge fund manager’s view
John Palmer, a co-founder of the hedge fund PL Capital, says boards are often underprepared generally. ‘Time and time again, we tend to be shocked at the level of knowledge directors have about their business,’ he says. ‘We sit down and talk specifically with directors and they have absolutely no understanding of capital allocation, return on investment, return on equity.’
A board showing command of the issues facing the company would deter hedge funds, Palmer says: ‘If you run the company well and you show up every day and act like an owner, I would tell you your investors probably won’t be active. Even though they may own your stock, they might not be activists.’
Jeffrey Brown, senior corporate counsel at Motorola, says having independent directors out with senior managers on a roadshow explaining his company’s opposition to the plans of investor Carl Icahn was important to stopping Icahn’s 2007 quest for a board role. [Icahn secured two board seats during a 2008 proxy campaign. See article on page 16.] When the broader shareholder base sees independent directors in support of management, they are more likely to go along, he explains: ‘Not to have a board member involved when you go out and talk to institutional investors is a mistake.’
Can’t hurt to listen
Companies do struggle with the demands for an audience with senior management and need to remember ‘just because [someone is] an activist investor doesn’t mean they are right,’ McNeal says. But putting up an immediate wall immediately probably serves to only to aggravate. ‘It seldom hurts to listen,’ Brown says.