By Johnson Manyakara

Shareholder activism generally occurs when the activist is dissatisfied. The targeted company is then pressured to make significant changes, more often than not, to increase stakeholder value. Is this good or bad for public-company boards generally or for the targeted company?

For Public- Company Boards

The growing influence of shareholder activists on capital markets has transformed how public-company boards interact with investors. This is particularly evident in the role of the board in the areas detailed below.

Role of the Board in Investor Relations

Progressive boards are now directly involved in investor relations with the following positive outcomes:

• There is now a growing realisation by most boards that shareholder relations are now a board duty, the board becoming a central player in shareholder engagement;
• Boards and executives now frequently review their investor bases in order to come up with a game plan for responding to  shareholder activism;
• Most boards are now promoting communication  with shareholders through, for example, “Shareholder Liaison Committees’ or similar structures; and
• The help of Independent Experts is now sometimes sought to help boards cope with these new shareholder-relations responsibilities.

Growing Importance of Outside Voices in Boards

In most companies, senior managers lead annual Strategic Planning Workshops to examine the direction the company must be taking during a given planning period and the prioritisation of company resources. Given the ever-increasing complexity of the global and digital world, progressive Boards have significantly increased their involvement in shaping company strategy. The need to re-examine assumptions and past approaches has never been greater.  This process should, ideally, include external speakers with specific industry and company knowledge. This is where shareholder activists, outside voices, can be a possible source for such speakers. Without a big paradigm shift amongst most traditional boards, bringing shareholder activists in strategic planning processes may be awkward, or even threatening but this might be the very source of those ideas that may ensure the company’s sustainable growth.

Growing Importance of Transparent Relationships Between Directors and CEOs

In the past, the basic operating norm around the relationship between the boards and their CEOs was to let the CEO get on with running the business and fundamentally trust their strategy. Things are changing! With the level of interest in the affairs of a company from shareholder activists, questions about company performance and strategy are now always front and centre. Boards that fail to tap into alternative points of view on corporate strategy and bring them to their CEOs for consideration can never be fully confident that management’ view of the world is the right one. A different twist on corporate strategy might just be “what the doctor ordered.” Failure to recognise this could be lethal to the company, its employees and its customers.

FOR THE TARGETED COMPANY

Whether shareholder activism is good or bad for the targeted company depends on a number of factors. There, certainly, are possible advantages and downsides from this wave of shareholder activism engulfing the corporate world.

Possible Advantages

• Holding feet to the fire: Pressure on boards and CEOs through a stated desire to replace some members of the board, or the CEO, through press campaigns, voting at AGMs, writing letters to the Corporate Secretary, etc. more often than not, helps to ensure that boards/CEOs keep their shoulders to the wheel.

• New faces may mean new ideas: Sometimes new board members, or new CEOs, bring fresh ideas on how management should use the company assets, improve operations or enhance shareholder value to the benefit of the company’s stakeholders.
• Demand for shares could push the share price up: Snapping up a large percentage of company’s stock in a relatively short period of time often results in the demand for a given counter rising sharply. This could push the share price up and, by extension, benefit average common shareholders.

Possible Downsides

• Selling could be an issue: Sometimes shareholder activists may purchase large blocks of stock resulting in the share price increasing. When the activists decide it is time to sell the shares, this may logically place a significant amount of downward pressure on the share price.

• Activists often drive a personal agenda: Activists often try to convince other shareholders and the media to buy into their agenda, looking out to primarily benefit themselves and doing what is in their best interests.

• Activists aren’t always right: The temptation to copy an activist’s buying or selling behaviour is often high, primarily because common investors perceive activists as being smarter because they have extensive experience and contacts on the market. However, activists aren’t always right – their timing can be off and they can, and do, lose money too.

BOTTOM LINE

Having an activist engaged in a stock may be good or bad, depending on the situation.  Sometimes activists have influence on companies that the average shareholder may generally not have. They sometimes bring fresh ideas to the table that may increase value for all concerned. The downside is that they often keep their financial interests above those of all others.