A WELL-ORGANIZED IR OFFENSE IS THE BEST ACTIVIST DEFENSE

Contributor: Deborah Rosati, Founder & CEO, Women Get On Board

Shareholders and Boards 

Generally, active and engaged shareholders serve as an important check in the power of a company’s board and executive team. But what happens when things go too far? How do you avoid the negative effects of corporate activism? According to a recent study titled, Investor Relations, Engagement and Shareholder Activism, by Chapman, Miller, Neilson and White (2021), a strong investor relations program can be a powerful tool in repelling unwanted investor activism. Regular, clear communication to investors helps eliminate mixed messages or misunderstandings and helps drive alignment with a company’s strategic direction.  

Shareholder Activism 

The recent rise in investor activism is a result of several factors including the demand for elevated governance and board diversity, say on pay and the major changes to the landscape in which companies are operating. The arrival of COVID-19, concerns around climate change, and the rise of the retail investor are just a few of the unique challenges that have provided activist investors plenty of opportunity to oppose the management team.  

Shareholder activism presents itself in several ways. Activists typically buy large percentages of a company’s shares and then embark on public campaigns challenging the direction of a company and proposing strategic changes. Shareholder activists seek to gain broad support and sway the votes of fellow shareholders through public letters to the board, media appearances, public presentations at investor conferences and even proxy fights for control of the board of directors.   

Elliot Management, led by Paul Singer, held $2 billion in shares of Twitter in 2020 and was able to gain three seats on the company’s board of directors. Singer embarked on a campaign to replace Twitter’s CEO, Jack Dorsey, out of concern that his attention was divided between other businesses. Luckily for Mr. Dorsey, Twitter outperformed against expectations and Singer’s campaign was abandoned. 

In another prominent example, the chemical company DuPont fended off an aggressive campaign from activist investor Nelson Peltz from Trian Fund Management. Trian held a 2.7% stake in DuPont and launched a very public campaign to take four seats on DuPont’s board of directors. DuPont spent $15 million in its own campaign to court shareholders and was eventually successful at winning over its top institutional investors, giving them the votes needed to approve its board nominations.    

The Role of Investor Relations in Mitigating Shareholder Activism 

The role of investor relations has evolved significantly over the past decade and has vastly changed over the past couple years. Investor relations officers must deal with a plethora of issues, but one that presents a unique set of challenges is that of the activist investor.  

Investor relations officers have a unique set of skills to communicate strategic direction without revealing information that isn’t publicly available. Investor relations programs tend to be much less robust when left up to the c-suite. Communicating with investors would be just a fraction of the responsibilities of a CEO or CFO, and the c-suite may be less likely to communicate about strategy to ensure they don’t talk about information that isn’t public yet.    

The authors of Investor Relations, Engagement and Shareholder Activism hypothesized that investor relations officers (IROs) who actively engage with investors create a less fertile ground for activists to gain influence over shareholders and will be more successful at rebuffing these advances.  

The authors found that when there is a dedicated IRO function in place, activist investors are less likely to buy large stakes in a company with the intent of exerting control. In other words, when a company controls the narrative and nurtures investor relationships instead of just relying on public disclosures, activists have less of a path to exerting influence. 

Trust within the investment community is paramount. A strong investor relations program can play a pivotal role in a firm’s success as it can control the narrative around strategic outlook and direction and provide the market with a point of contact and regular updates about the company. Building long-term relationships with investors through regular one-on-one communication helps combat activism in the long term. 

The paper also found several additional factors that influenced the likelihood of attempted influence from activists. One of those factors is the concentration of the investor base. When an IRO is in place, more concentrated investor bases seem to be less likely to be vulnerable to activism. When you consider the importance of one-to-one communication in building relationships, it makes sense that the fewer investors there are, the more attention you can devote to each. 

Not surprisingly, the authors found that negative company performance was associated with increased activism. In that case, active and engaged investors could actually be helpful in holding the company accountable for its performance.  

IRO tenure also seems to be a factor in staving off activist investors. If building long-term relationships with shareholders leads to increased satisfaction with the direction of the company, it makes sense that continuity in the IRO role will contribute to the lower likelihood of activism. 

Finally, simply having an investor relations function alone isn’t enough to prevent activism. There is evidence that having an IRO helps limit the escalation of attempted activist campaigns. When an activist does launch a campaign, the authors found that having a dedicated investor relations function helps resolve conflict faster and limits the contentiousness and costliness of an activist campaign. Having an IRO in place also seems to increase the likelihood that activist shareholder proposals will be withdrawn. If IROs are effective at resolving shareholder concerns and consolidating support from shareholders, activists are less likely to proceed with their proposals.  

Key Takeaways: 

• IR engagement is associated with increased investor confidence in management and the board. 

• Proactive and regular communication with the firm’s investor base corresponds to a lower likelihood of investor activism. 

• The effectiveness of engagement decreases when there is extreme negative firm performance or a less concentrated investor base.  

• The effectiveness of engagement increases with IRO tenure. 

• In addition to deterring activism, IR engagement leads to more withdrawn shareholder proposals and mitigates the costly and contentious escalation of initiated activist campaigns. 

You can find the paper here.