Companies that perform sub-optimally may gain the attention of activist investors, who are seeking to reconstitute the current board with new, improved directors. The “activist directors” are put on the board by investors to, hopefully, turn a declining company around and maximize profits.
“Activist investing is an asset class,” says Patricia Lenkov, Founder of Agility Executive Search. “Activist investors are investing in companies where they feel performance is suboptimal. They are then suggesting various types of changes to the company and in many cases this involves changing out board directors.”
Activist investing has been gaining momentum in the boardroom, but, according to Lenkov, there has also been a rise in activist investors suggesting management changes in addition to board changes: “More recently they [activist investors] are also suggesting senior leadership changes as well, most commonly starting with the CEO.”
Of course the change in board and management is not met without resistance, but the the objective of the activist director is to operate on behalf of the company’s best interest. However, there is a misconception that they are only there for the interest of the activist investor.
“Activists directors are a source of new governance oversight, and hopefully improvement for the company,” explains Lenkov. “Their role is to be an independent director and work towards turnaround and improvement at the company. The challenge is to integrate with the rest of the board members and be seen as working on behalf of the best interests of all investors in the company.”
The activist investor is always looking to make improved decisions for the company. When this happens all stakeholders benefit. If current leadership is not putting the company on the path to success then change is necessary. “The goal is always improvement of the company through strategic, operational and leadership changes,” notes Lenkov.
According to Lenkov, if a company is doing well then there’s likely no reason for an activist investor to take interest: “I always say the best defense is a good offense, and in this case it means if a company is doing well then activists typically are not interested in investing.
“All investors look for opportunities to increase the value of their investment. Demonstrate that this is happening and they will look elsewhere!”
Lenkov will be a discussant in Changing Corporate Governance One Company at a Time: The Activist Board Search at the Global Shareholder Engagement & Activism program in Toronto, Canada on September 28-29.