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What tactics do activists employ to initiate change at portfolio companies?
This article is the second of a three-part series which will answer the question “What is Shareholder Activism?”. The following will present a deeper dive into the tactics activists employ in their campaigns against corporates.
As described in the previous article of this series, the difference between active investment and “activism” is not binary; any active investor may be perceived as an “activist” by exercising one or more of the following tactics:
Private engagement is generally employed as a first attempt to affect the intended change behind-closed-doors. However, private engagement usually continues throughout a campaign even if public pressure is applied, where discussions will seek to halt public exposure. Private engagement generally involves:
o Discussion with Management and the Board: Engagements can be held between investor portfolio managers and key management personnel or independent board leadership. Activists will seek an audience with the CEO, Chair of the Board, and independent directors; and to control the agenda (strategy, governance, or other topics). Investors expect companies to be responsive to engagement, therefore, progress will depend on the mutual commitment to reach an understanding on concerns raised. Discussions may last for years.
o Private Letters: many investors (activist or otherwise) will issue letters to either management or the board of directors to milestone discussions or formally express concern regarding a certain issue. Activist investors will do the same, often with the intention of receiving a written address from the company. Private letters do, however, pose a risk to a company as there is the threat that these letters could be made public or leaked
In cases where these tactics don’t yield agreement, taking the campaign public is the next step for an activist. The intention is to mobilize a wider group of shareholders and stakeholders to pressure the company into action. These tactics (as with private engagement) can be implemented with varying degrees of aggression:
o Press Releases & Letters: An activist may initiate campaign publicity through a press release, which could contain an open letter or the publication of a previously private letter. These releases will outline the core concerns held by the investor and the demands previously communicated to the company. The publication is intended to prompt a response from the company and draw out other investors to engage on the matters included.
o News Media: Activists may also use media coverage to increase pressure on companies to respond or otherwise act. Commonly, activists will retain public relations advisors from the beginning of their campaigns to utilize media effectively.
o White Papers: Further to written publications, activists often make use of slide decks to summarize their thesis in a digestible manner. These can be released at any point in a campaign and are more deliberate near a contested meeting where the presentation will be the central resource for investor consideration – this presentation is known as a “fight deck”.
On the rare occasions where a company and investor are unable to find a mutually agreeable position, an investor may escalate a campaign further to challenge the board at a general meeting (either the annual general meeting or calling an extraordinary general meeting). This is independent from the company’s size, capital structure or geography.
Most simply, an activist can exercise their votes. Activists can have large stakes in companies and so a negative vote on a key proposal can create additional pressure on a company. In these two further stages, activists can lobby other investors and proxy advisors to support their campaign.
o “Vote No” Campaign: An activist may call on other shareholders to vote against a management proposal at a company’s general meeting. This is an effective tool for channeling existing shareholder dissent, as making the case for change (i.e. voting against management) is an easier sell to other investors and proxy advisors than proposing what specific change is needed (i.e. voting for a shareholder proposal). These campaigns can be directed at an individual director, a group of directors, remuneration proposals, capital authorities, or a vote on a transaction and other non-routine proposals.
o Shareholder Proposals: Excluding legal action, this is the most aggressive step an activist can take in trying to affect change. Shareholder proposals commonly seek board representation or dismissal of directors. Outside of the US, however, investors also call for capital allocation changes, strategic review, and governance improvements. Although proposals rarely succeed, garnering enough support to prompt a progressive reaction from the board can be satisfactory for an activist.
Activists can make progress by leveraging these tactics in various forms and to varying degrees of aggression. However, a common thread in all successful activist campaigns is the support of minority holders (commonly institutional investors).
Part III of this series will look into the receptivity of institutional investors to activism – specifically activist proposals – as narrated in their voting policies which are aggregated on AQTION.
Authored By: Andrew Brady and Will Samuels
