The corporate landscape is changing in so many ways. Many large companies have met their demise, regulations are tightening up, boards are becoming more independent and shareholders are becoming more active. In the not-too-distant past, it was common for shareholders to meet with board directors annually and essentially leave them alone for the rest of the year. Institutional shareholders and activist groups are increasingly becoming a threat to board and management decisions. Shareholders sometimes make their desires known in small ways, through direct contact. Other times, shareholders strong-arm a change in board demographics with fierce proxy contests.
Shareholder activism affects board members, shareholders, and legal teams inside and outside of the corporation. Board directors are well-advised to take a proactive stance against shareholder activism and have plans in place to address it.
Think Like a Shareholder to Head Off Activist Activity
Wealthy individuals, hedge fund owners, private equity firms, and any individuals or groups that purchase large numbers of a company’s shares may decide that they aren’t happy with how boards and managers are running the company. The larger their investments, the more power they have to effect major change within the company. Positioning the right people on the board can help them accomplish that. Investors who purchase 5% or more of a company’s shares must file SEC Form 13D, which may not be a red flag for potential activism, but board directors should be aware of who the major shareholders are.
Investors are in the business to make money and to protect their investments. But as part of their board duties, board directors need to protect their shareholders’ interests. One way that they can do that is to put their “shareholder hat” on and try to see the company’s planning and progress from the shareholders’ perspective. Shareholders want assurance that the company is well-managed, that costs are in line, and that the executives and board have thoroughly explored ways to make the company more valuable.
Having a Healthy Awareness of Shareholder Activism
In an analysis by Bloomberg BNA, in the first six months of 2017, 65 public companies expressed concerns about shareholder activism as a risk factor in SEC filings. This is more than five times as many companies with the same response during the same period three years ago.
Addressing concerns about shareholder activism isn’t one of the major duties of in-house counsel, and the attorneys don’t necessarily need to know everything about it. Nonetheless, it’s helpful for in-house counsel to have some management skills and proxy experience. They should also be able to keep a pulse on simple corporate governance as it relates to shareholder activities. Outside legal firms may be on standby for contact and counsel as needed.
Communication Is a Key Deterrent to Activism
Shareholders lack a certain degree of trust in board directors and managers. One of the best ways to increase shareholder confidence is to use communication to strengthen the relationship with investors. It’s important to pay attention to all of the investors, not just the major shareholders.
Company culture is an important part of good corporate governance. One of the ways that in-house counsel can use communications with shareholders is to make it an important and visible part of the company’s culture.
When shareholders receive ongoing communications that assure them that the company has a sound long-term strategy and they can ask probing questions about it, they are less likely to make allegations about poor management practices.
When companies get wind of unrest among the shareholder ranks, it’s often better for in-house counsel or an independent director to address the situation, rather than the board or a representative of company executives. Shareholders are more likely to have a little more trust and faith in independent directors that hold their own in the boardroom or in attorneys intending to protect the company’s legal interests.
Good Corporate Governance Structures Enhance Shareholder Relationships
Effective general counsel teams get involved in keeping corporate governance in check. One way for boards and in-house counsel to increase the trust of shareholders is to conduct a regular vulnerability audit.
An internal vulnerability audit may bring forth shareholder concerns about operating issues or balance sheet inefficiencies. This information can help boards take proactive steps to alleviate concerns, even if that means pushing for board or committee turnover. Tactical changes to the bylaws may also signal to shareholders that the board is taking a proactive approach to company management.
Taking an Objective Approach to Shareholder Activist Allegations
Another part of the board’s responsibility in good corporate governance is self-evaluation. While it’s not always easy to be objective, board directors need to continually size themselves up against their competitors.
Annual board evaluations are a prime time to ask the tough questions, like whether the board is performing poorly compared with their competitors. If so, discover what’s at the root of the problem. Has the board made some poor strategic decisions? Have they gone back to the drawing board to re-evaluate strategic planning? Have they mismanaged a challenging acquisition? Are they actively managing cyber risk activity? Are they branching out to take advantage of new and emerging opportunities?
The answers to all of these questions are equally valid in the minds of the shareholders. While the board may be talking about them in the boardroom, it’s also a good idea to communicate any shifts in strategies with shareholders to increase their level of confidence in the board and managers.
Proactive In-House Counsel Reduces Risk of Reactive Shareholders
In-house counsel can still have influence on shareholder activists once they’ve started an uprising; however, it’s far easier and more efficient to prevent them from starting an uprising in the first place.
Even the best-laid plans may not prevent shareholder activism, so companies will need to prepare for it as best they can. In addition to being proactive and having stellar connections with outside counsel and financial advisors, companies will want to have a great internal media and public relations team on their side. As positive or negative news develops, the board can quickly work with media teams to portray new developments honestly and accurately.