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Report: Prepare for Increased Shareholder Activism

By Steve Bates  4/20/2009
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Upcoming corporate proxy seasons should generate an increase in shareholder activism and “a new wave of demands for corporate change,” warns a new report from The Conference Board.

The New York-based business advisory organization says in the report that many large U.S. corporations have relatively strong balance sheets and healthy long-term earnings potential, despite the slumping economy. That should attract activist shareholders hoping to boost the value of their stock, says the report, Avoiding Shareholder Activism. It is the fourth in a Conference Board series titled “The Role of the Board in Turbulent Times.”

Corporate directors and senior executives should be concerned, say the report’s authors, Damien J. Park, MBA, and Matteo Tonello, LLM, SJD. Park is president and CEO of Hedge Fund Solutions LLC in Philadelphia. Tonello is associate director, corporate governance, for The Conference Board.

“The upcoming proxy seasons will witness an increase in shareholder activism and a new wave of demands for corporate change,” says the report. “In particular, in light of rampant liquidity problems, there is likely to be a shift from the financial-oriented activism campaign aiming at cash extractions to new initiatives pursuing strategic, operational and governance-related corrections.”

The U.S. financial system’s poor health in the spring of 2009 “leaves many companies vulnerable as activist investors, like other value shareholders, continue to target those organizations whose prices do not fully reflect business potentials,” the report continues.

Activist shareholders “have begun to focus primarily on those strategic, operational and organizational adjustments that may be rewarded by the stock market through a share value increase.” The report warns that activists might attempt to impact strategy by:

  • Proposing cost-saving measures or ways to improve efficiency.
  • Revising the business plan.
  • Seeking a change in top management.
  • Initiating, revising or opposing corporate transactions, such as mergers or acquisitions.

The Conference Board report says that activist shareholders might attempt to make changes at the organizational level, such as:

  • Requiring that board members be subject to annual elections.
  • Questioning the independence or expertise of directors.
  • Limiting terms of board members.
  • Separating the chairman and CEO roles.
  • Demanding investigations of potential fraud or unethical behavior.
  • Insisting on additional financial disclosure.
  • Strengthening pay-for-performance mechanisms for executives.
  • Imposing additional accountability.

News reports about high executive compensation, including bonuses, at troubled companies will likely lead to additional shareholder scrutiny, particularly involving board members who serve on compensation committees, the report notes. It adds that erosion in confidence in corporate leadership might make it easier for activist shareholders to enlist the support of traditionally passive investors in trying to effect changes.

Resisting such moves is tricky, however. “It will become more difficult for a company to justify the significant expense of conducting a proxy fight to resist activist demands,” the report predicts. In addition, it says, “Corporate leaders should be careful in expressing public criticism of … activists’ demands and avoid becoming confrontational.”

However, the authors offer suggestions for senior management to minimize the undesirable impact of shareholder activism, including:

  • Monitoring the shareholder base and trading activities, noting large accumulations of stock.
  • Maintaining up-to-date profiles of institutional investors and others with large holdings.
  • Communicating regularly with the largest institutional shareholders.

The report notes that “a history of positive relations with shareholders, especially the largest ones, can be the most important asset when an activism campaign is being launched or is in course.” It points out that in 2007 pharmaceutical giant Pfizer announced the practice of inviting representatives of investors to meet regularly with the company’s board.

Similar outreach, plus a close look at an organization’s gaps and vulnerabilities, can help fend off undesired activism, say Park and Tonello. They suggest that directors consider:

  • Reassessing strategic goals in light of changes in the economic climate.
  • Designating a corporate governance officer who recommends best practices to the board.
  • Telling senior financial officers to report frequently on conditions that could make the company a target of activists.
  • Developing an inventory of corporate issues that might generate activism.

Steve Bates is manager of online editorial content for SHRM.

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