The Importance Of Post-Activist Shareholder Communications

Introduction

FTI Consulting’s Quarterly Activism Vulnerability Report found there were 119 campaigns in the third quarter of 2022 against US and Canadian companies, versus 87 activist campaigns in the third quarter of 2021.¹ Although companies focus on activism during the campaign, its equally as important to consider the impact it will have after.

The after-effects of shareholder activism can be long-lasting for a company and for its current and future shareholders. Irrespective of the proxy results, the company will be changed forever and need to reintroduce itself to existing and prospective investors.

Company Strategy 

Depending upon the activist’s assessment of the company, changes in company strategy can include a divesture (carve out, or spin off divisions), performance improvement initiatives, a share repurchase plan and asset sale. These actions are often referred to as “capital responsiveness,” or how companies face changing business conditions in order to stay competitive.² Put another way, Harvard Business Review defines it as the ability for companies to quickly shift capital to new high-value or low-value uses or being able to make significant changes to where capital is allocated.³

As changes to corporate strategy will affect how investors view the company as an investment opportunity, any change to strategy must be delivered to investors. Traditionally, changes in strategy driven by activists will prioritize short-term shareholder value over long-term company growth. Investors will make buy and sell decisions based upon whether or not they agree with the revised strategy. For example, long-only investors who supported management during the proxy contest, will have concerns about a shift in strategy that focuses on the short term. Meanwhile, hedge fund and fast money investors will look forward to maximizing shareholder value over the short-term.

As a result, companies fear that a strategy shift could create unnecessary volatility and sell pressure on the stock. To combat this risk, companies often look for long term commitments from activists. In a recent report published by the NYSE Governance Services, “Three-quarters (78%) of directors (surveyed in the study) believe that activists who push for a change in strategy should be required to hold the company shares for one to three years subsequent to the implementation of that strategy.” ⁴

These assurances are put in place to help protect the long-term focus of a company and should be communicated to investors. Although these requirements may not prevent investors from selling, it could bolster investors who do not hold shares to initiate positions. This new crop of investors may provide the depth to liquidity needed to support the stock price.

Company Management 

The changes to leadership range from management change, board change, executive compensation, and the addition of the activist to the board. If a company’s strategy represents its business plan, leadership is responsible for executing it. When leadership changes are presented to investors, investors need to decide on whether or not they think the new leadership can be successful.

Separately, boards that have been in place typically build up trust over the years and changes to the board can create the challenge of “getting-to-know-new-faces.” The members have access to privileged information, and it is often taken for granted that this information will not be shared. A new face, who also represents a key investor will cause confidentiality concerns5 for the company and shareholders alike. A key take away published by NYSE’s Governance Services6, shows that directors overwhelmingly agree that if an activist places a director on the board, that the fund should be subject to the same restrictions on pledging and hedging and under no circumstances should that director be allowed to take confidential information back to the fund.

Shareholders

Shareholders remain the target audience for communication but are they the same investors you have been speaking with? Chances are these investors have adjusted their shareholder positions and views on the company as the pressures of an activist campaign drained resources and executive focus away from the business.

By nature, the capital markets are dynamic as shareholders are free to make buy and sell decisions based on information they are receiving about the individual company and macro-economic or geopolitical events. In this sense, Shareholders are a moving target even in the best of times for a company.

In a post-activist environment, identifying current and potential investors becomes even more difficult. In times, of shareholder activism, many smaller investors sell shares to avoid participating in the event. This practice is often referred to as “voting-with-their-feet”⁷. These shares are often purchased by fast money investors who are looking to turn a profit on volatility. Other buyers could represent wolf pack investors⁸, who are seeking to support the activist.

Meanwhile, the larger institutional investors will look to vote in-line with their goals and objectives. If the result of the vote puts the company out of line with its goals, they may choose to sell the stock. Finally, new investors may see the outcome of activism as an opportunity to initiate a position. Depending on the outcome, they may view the changes a positive catalyst for company. In this scenario, there could be a fresh crop of new institutional investors entering the stock.

Ultimately, investor intelligence and a strong investor communications plan can help to mitigate some of the volatility, but more importantly conversations with investors can help to provide valuable insights into how the street views the company. Furthermore, an active shareholder communication plan that is also inclusive of leadership will introduce new board members to the street and provide an opportunity to level set investors’ expectations and perceptions of the company.