Management teams are facing a formidable new challenge in the growing ranks of activist investors. Expectations for shareholder dialogue have also risen. How can companies meet these new demands?
Activist investors have officially reached rock-star status. Carl Icahn, whose tactics strike fear into C-suite executives worldwide, has 276,000 Twitter followers. The pronouncements of Bill Ackman, head of activist fund Pershing Square, are chronicled almost daily by the press.
Indeed, the likes of Icahn and Ackman are in the lead of a growing movement. Veteran activists such as them are increasingly being joined by first-timers: in 2015, 49 campaigns were waged by new activists, according to the Wall Street Journal, representing a 36% increase from a year earlier.
Activists can bring innovation and discipline. Yet companies are often caught off-guard by their approach, leading to major disruptions in their strategic plans. In order to prepare adequately, firms must assume that an activist could enter the picture at any time.
Learning the new language of shareholders
Preparation means being proactive with communication efforts and constantly engaging in dialogue with investors, both current and prospective, individual and institutioned. To this end, improvements in technology have allowed companies to reach stakeholders faster and with greater ease, speeding up the process.
As these trends take shape, we’ve interviewed five experts to discuss how shareholder communications practices are changing. These experienced professionals give insights into how to respond to activist campaigns, how best to grant access to board members, and what to keep in mind as companies prepare for a new rule regarding CEO compensation.
The ascent of activist investors and the need to adapt to board-to-investor communications are producing drastic changes in the way companies interact with their shareholders.
QUESTION > What trends, legal or otherwise, are you noting that have affected shareholder communications?
Kai Haakon E. Liekefett > The overall trend, which has been going on for many years, is shareholder activism. This is clearly having an effect on the way companies go about shareholder communications, probably forever.
About 15 years ago, companies and boards were not very focused on shareholder communications – it was more a board-centric world. But the entire system in the US has changed to a more shareholder-centric world.
One especially noteworthy development is a change in companies’ governance structures. Most companies used to have a corporate secretary in charge of corporate governance and then they had the investor relations (IR) officer. In the past, they did not work together very much, but this has been changing dramatically for the last couple of years. There is a widespread realization, in particular at large-cap companies, that the corporate secretary and IR officer need to work hand-in-hand, because when you’re dealing primarily with large institutional investors as your shareholder base and they are all focused on corporate governance, you need to make sure that the left hand understands what the right hand is doing.
Lex Suvanto > I think the most serious trend happening now is what I would call the “Uberization” of industry. There are many industries undergoing profound change – digital industries first and foremost, but also the automobile industry, the media industry, and just about any other industry that is being upended by significant innovation. Their business models are being called into question as new entrants create a different future for a sector. That is putting significant pressure on industry incumbents to talk about their strategy and about how they’re going to continue to grow despite the Ubers of the world coming in and paving new ground for themselves.
A related trend to consider is the drive by companies to cultivate more long-term shareholders. The focus is turning away from short-term shareholders and companies are contemplating how to talk more about long-term strategy – longer than just one or two years. This raises questions about whether companies should provide guidance, especially long-term guidance, which is often difficult given the lack of visibility into the distant future.
And a third trend is the impact of macroeconomic volatility on the way companies communicate with their investors. In January, when we had pretty severe market volatility, it caused companies to emphasize the resilience of their models and to think again about the debt side of the business rather than just the equity story. The markets have leveled off somewhat since January, but we saw how macroeconomic concerns can drive the content of shareholder communications.
John Viglotti > One notable trend has to do with the proxy – companies are spending more effort and more money to create engaging materials around their proxy. Oftentimes, the proxy will include color, graphs, and charts, because companies want to emphasize certain proxy issues with investments. By contrast, many companies’ annual reports now have zero color – it’s all just black-and-white text. With Dodd-Frank and other SEC regulations, there is also more and more information required to be included in the proxy, especially in terms of executive compensation and analysis.
At the same time, every company takes an individual approach to its communications strategy. There are a lot of companies that are “just compliant” – they follow the letter of the law in terms of how they communicate with shareholders and not really telling the story of the company, where they’re going, or why you should be investing in them.
In contrast there are other companies that are focused not just on communicating with current shareholders but also on attracting prospective investors. They are interested in telling a story, a vision, and they’re more frequent communicators. So instead of just sending a press release every quarter around their earnings, they may be sending 30-40 press releases.
Chris Ruggieri > Over the last several years, there has been a fundamental change in the relationship between public companies and their owners. One aspect of that change is related to regulations and governance. The Dodd- Frank law’s “say on pay” rule, for instance, is a regulatory change that has emboldened investors to speak their minds directly about executive compensation. We’ve also seen an increase in proxy access – this issue is being hotly debated in the industry.
Another key area is the emergence of new asset classes, most notably activist hedge funds. Up through 2014, activist hedge funds were one of the best-performing asset classes, and activists have been very bold in making assertions about how companies should be managed and how capital should be deployed. The rise of activism was driven in part by the financial crisis, which made investors seek more direct engagement with the companies in which they’re invested.
The last key area I would mention is the information technology revolution. The advent of the Internet and mobile technology has made it easier than ever for investors to communicate with one another. As a consequence, companies have lost some degree of control over the dissemination of information. The velocity and transparency of information have never been higher.
Jason M. Halper > On the investment side, I think we’re seeing an acceleration of trends that have been around for a couple of years now. Those include: an increase in assets under management of activist hedge funds; an increase in the success rates of activists, depending on how you define success; and a shortening of the time periods from when an activist comes on the scene until the end of a campaign.
On the corporate side, you’re seeing more firms adopting formal protocols for shareholder engagement. When it comes to director engagement, these protocols could address what permissible topics are; the process by which a shareholder can request dialogue; steps for preparing a director to engage in dialogue; and, particularly, specifying which directors are tasked with engaging in that dialogue.
You’re also seeing increased engagement by institutional shareholders, who represent the third leg of that stool, if you will. They are much more active and vocal about things such as corporate governance and executive compensation, and much more willing to engage with both activists and companies.