After a robust 2017, shareholder activism shows little sign of abating this year. That trend has spurred a growing number of boards of directors to move to prevent their companies from becoming targets and avoid the disruption of a public activism engagement.
Not surprisingly, this has led many board members to ask: How much disruption can a shareholder activist cause?
The answer: a lot.
Who is ripe for disruption?
There is no defined trigger for shareholder activism today. While activists most often target underperforming companies, they are increasingly setting their sights on healthy companies as well. Most activity takes place at companies with market capitalizations of under $2 billion, but well-known companies with capitalization as high as $225 billion are also being targeted.
Even the goal of activists is evolving. In some cases, activists are urging public companies to drop transactions, which is a shift from the more familiar push for higher prices to be paid to the targeted company.
Many activists deride management when they state that shareholder activism is extremely disruptive to a company and can be harmful to its performance. By being aware of the level of disruption in a public shareholder activist engagement, a company can better manage through with the least amount of negative effects.
In each of the above circumstances, the disruption is always impactful and rarely brought to the public’s attention. Disruption is likely at its greatest, however, when a shareholder activist calls for change in the structure of the targeted company—such as a split, a sale of a division, a spin-off, or sale of the entire entity.
Keep your stakeholders close
Whatever the catalyst for activism, communicating with three of your major stakeholders—employees, suppliers, and customers—can help in managing the disruption.
Employees: Typically, your best employees are most sensitive to rumors of change and may be the first to leave if they sense the company may be pressured into doing something that will disrupt stability. This is particularly acute among employees who are directly connected to driving revenue, namely, the sales teams. For these reasons, companies in activist situations should spend time and energy explaining the continued confidence in the going-forward plan and keep employees steadily updated through firm-wide communications, town halls, and specific geographical or segment-tailored engagement as needed.
Suppliers: Keeping your suppliers informed is important, as an activist’s public statements can have a substantial effect on supplier negotiations. This situation can become particularly disruptive when an activist names a potential suitor for the company that is serviced by another supplier.
Customers: Companies that sell services or have longer-term contracts with their customers may feel the disruptive impact of activism more acutely than others. These customers may delay or cancel purchases due to concerns about the statements and actions of the activist. This type of disruption can have a lasting effect on shareholder returns.
It is important to note that in an acute activist situation, the C-suite often spends 30 to 50 percent of its time on the situation. This is greatly disruptive in and of itself and can often have a debilitating effect on the performance of the company.
Many activists deride management when they state that shareholder activism is extremely disruptive to a company and can be harmful to its performance. By being aware of the level of disruption in a public shareholder activist engagement, a company can better manage through with the least amount of negative effects. It is also extremely important for investors to know that by going public, an activist may cause long-term harm to the companies in which they are investing.
Steven Balet is an activism expert in FTI Consulting’s Strategic Communications segment and is also co-head of the Activism and M&A Solutions practice.