Preparing for Shareholder Activism – CFO

The concern that CFOs need to consider inquiring on their own: “How would I explain…

The concern that CFOs need to consider inquiring on their own: “How would I explain the company’s functionality to shareholders if I were an activist, and what actions would I propose to probably increase shareholder price?”  

For CFOs of publicly traded companies, it is under no circumstances been extra important to pay attention to shareholder activists. When the COVID-19 pandemic took maintain through the heart of the 2020 proxy year, many activists deserted campaigns or quickly settled. Activists and issuers shifted their concentrate to business survival in the extensive-expression rather than close to-expression will increase in shareholder price. As U.S. fairness marketplaces have extra than recovered their early pandemic losses, shareholder activists have resumed initiatives to determine underperformers and catalyze actions to increase share selling prices. 

Almost three-quarters (74%) of activists surveyed as part of the EY Global Company Divestment Analyze said that the pandemic has afflicted how they appear at targets. The most significant places of concentrate — the flexibility of a company’s value foundation (80%) and the means to adapt to distinct routes to marketplace (70%) — mirror the issues companies face changing to variations in marketplaces and purchaser actions through and right after the pandemic.

Five Techniques to Think Like an Activist

CFOs need to concern all places beneath their purview as probable fodder for an activist marketing campaign and deal with issues that shareholder activists would likely concentrate on. 

  1. Capital composition. Do we have the appropriate funds composition to aid the company’s strategy? Underleverage is a prevalent criticism of shareholder activists. Outside the house of a few sectors, mainly economical expert services, activists argue that retaining an financial investment-grade credit history ranking is pointless and will increase the company’s value of funds. Activists, and many common institutional traders alike, look at leverage as supplying management with self-discipline and excess fairness funds as ensuing in fewer management accountability. 
  2. Capital allocation. Suboptimal allocation of progress funds was named by sixty three% of activists in the survey as 1 of the most important aspects in pinpointing new financial investment prospects. CFOs can check with the next: How does the business deploy funds? Is there a outlined methodology to assess prospects? Does the business stick to that framework? What would induce the business to repurchase shares rather than deploy out there funds in other places? Is the framework communicated plainly to shareholders?
  3. Measurement. How is the business measuring its return on funds, as a full and for personal investments? What metrics are employed (return on financial investment funds (ROIC), overall shareholder return (TSR), and so forth.)? Who gets this information and facts internally? What actions are taken based on that information and facts?
  4. Environmental, social, and governance (ESG). Institutional and index traders anticipate rising amounts of disclosure all around ESG and are beginning to foundation their voting conclusions on these issues. How does the business track and quantify ESG-linked metrics and initiatives? Does the business integrate ESG into its funds allocation framework?    
  5. Shareholder engagement and disclosure. Shareholders are demanding extra granular information and facts. How does the business engage with its shareholders and how generally? Is there a devoted outreach plan aimed at proxy voting groups at the large passive and actively managed funds? Does the business actively solicit shareholder views? How does the business act on shareholder worries, and how is that action communicated back to shareholders?
Tackling Activism Risk

Soon after this critique, CFOs can acquire quite a few measures to put together for probable activist curiosity.

Very first, do not undervalue your company’s vulnerability to shareholder activism. Each publicly traded (or soon to be publicly traded) business is at risk. 

In current yrs, activists have focused companies that have sent outsized good overall shareholder returns in the year prior to the activist marketing campaign. Honeymoon intervals for newly set up management groups have evaporated as activists consider to drive their strategy strategies prior to a new CEO can implement his or her strategy. A business becoming the concentrate on of a current or even present activist marketing campaign has not dissuaded other activists with a distinct point of view. Activism is not chickenpox it can concentrate on you extra than when.

Second, be expansive in your evaluation of probable activist vulnerabilities. Do not concentrate on just the apparent issues. Put you in the sneakers of an regular shareholder possessing substantially fewer information and facts. What messages might resonate? It is generally practical for an unbiased third bash to assistance with this physical exercise since it is straightforward to lose sight of the forest when you expend every day amongst the trees. Understand that shareholder aid for an activist does not relaxation entirely on the feasibility of the activist’s strategies. Generally, in the scenario of a contested director election, shareholders use their votes to protest the standing quo and sign their need for modify in general. 

3rd, be proactive. Do not wait for an activist to acquire an curiosity in the business prior to you acquire action to deal with probable vulnerabilities. Ready helps make the business appear reactive and defensive. CFOs can look at the company’s company governance composition and assess it to the evolving expectation of the company’s shareholders. Take into consideration transforming any “shareholder-unfriendly” provisions. Rationalize orphan belongings and business units. 

Fourth, update the shareholder engagement and communications strategy. Supply far better information and facts, extra routinely, and in a way that shareholders can recognize. Interact routinely with financial investment determination-makers, as properly as the proxy voting and governance groups at the prime twenty shareholders. Include senior management and find administrators in these conversations. 

Be Ready When an Activist Methods

Even with this preparation, an activist may still solution the business. Have a strategy in area. Know which business leaders will engage with a shareholder activist and which will continue being focused only on the business. 

Know who your outside advisers will be and have a strategy in area to activate them in quick detect.

Proactively pinpointing and addressing probable places of activist attention is an important strategy to reduce the prospects of turning into the concentrate on of a marketing campaign. And if it does occur, the main strategy for working with an activist solution is to engage with the activist even though retaining the management team’s concentrate on executing its strategy to produce extensive-expression sustainable price.

David Hunker is principal, Ernst & Young EY Americas shareholder activism protection leader. 

The views mirrored in this posting are those of the writer and do not essentially mirror the views of Ernst & Young LLP or other member firms of the international EY corporation.

contributor, Risk Administration, shareholder activism, shareholder engagement