Amy Freedman is Chief Executive Officer of Kingsdale Advisors. Amy is a seasoned capital markets professional, with over 12 years of experience in investment banking. Amy is responsible for the day-to-day operations of Kingsdale Advisors with a focus on providing superior service and outstanding strategic advice to public company boards and management as they strive to enhance value for shareholders. Amy is also responsible for leading the growth of the firm and the thought leadership of the Kingsdale team.
Christopher P. Skroupa: Some have looked at the slowdown in activist fights and targeting of smaller companies to conclude that activism is going away or at least losing favor with other shareholders. Is this the right way to look at things?
Amy Freedman: No. The nature of activism is changing, but it is still a very real threat to virtually every company. It is important to note the top line numbers only include publicly disclosed proxy fights. Kingsdale regularly advises multiple large-cap companies who are engaged with activists behind closed doors. Activists know that boards don’t want to waste time and money in a proxy fight if they can avoid it and directors certainly don’t want to have their reputations damaged in the media. This makes activists more willing to attempt to negotiate behind closed doors and use the threat of a public fight as leverage.
We are also seeing more instances where multiple activists enter a stock, though only one will have made their position public, in what is referred to as a “wolf pack.” This isn’t surprising given the proliferation of activist funds, level of interaction between them, and the fact that they generally look at the same indicators for companies who would make a good target. For issuers, multiple activists mean it will be hard to isolate their challenger and may mean the potential for a full-blown and costly fight is greater if they are willing to split costs.
Skroupa: We have heard you say that “not all activists are created equal,” and that boards need to be thoughtful and tailor their response to an activist. How can boards define exactly who they are dealing with and assess what steps might be appropriate in responding?
Freedman: We say it is important to define the activists from the ankle-biters. For issuers set to encounter an activist, as part of your SWOT process, it is important to assess and understand how credible the shareholder posing a challenge really is: Are they a credible activist in the stratosphere of Ackman and Ichan, or are they simply an ankle-biter?
We urge our clients to consider a number of aspects of potential activists: their influences and history in the industry, their previous successes or failures in campaigning, the content of their target company analysis, and finally, how big their wallet is. While an activist can run a withhold campaign relatively cheaply by issuing some press releases and putting up a website, posing a legitimate threat to force change if an issuer resists is expensive. Even ankle-biters who have the money needed to mount a meaningful campaign need the inclination to spend it.
Proxy fights are like poker games: As much as you are playing your cards, you should always be playing the person across the table from you.
Skroupa: How have you seen the objectives of activists change over the years and what do you expect them to focus on in the coming year?
Freedman: Two of the trends we have been keeping an eye on over the last few years are activist intervention in transactions and the use of short slates as a tactic. We are seeing lots of activists both privately and publicly pushing for asset sales and spin offs, especially in the energy industry.
The use of minority slates is sloping upwards as they prove to be a more effective way to gain influence. We attribute the appeal and success of minority slates to a few factors:
First, it is easier to win with a minority slate as you only need to establish that two or three of your nominees are better than the existing directors (and easier to assemble such a short-slate), not an entire slate of incumbents. From a messaging perspective, with minority representation, activists argue they want to contribute ideas to the strategy not fundamentally overhaul it as would be implied by a board takeover. There is far less need to come up with a detailed plan to take to shareholders that will be publicly challenged. Retail shareholders buy the “skin in the game” message readily and support representation—but are way more wary of those seeking control. They support a shake-up over a coup d’état.
Second, when only seeking a small representation on the board versus a full takeover, activists have found management is willing to consider a small expansion of the board or identify a few sacrificial lambs amongst the incumbent directors who can be given up to cut a deal.
Third, by seeking to replace a minority of the board, the burden of proof required by proxy advisory firms to obtain their support is lower (e.g. no detailed strategic business plan is needed).
Skroupa: The SEC has proposed the mandatory use of universal proxy cards in contested elections. What are some of the implications and strategic considerations for boards?
Freedman: Kingsdale, along with our client Bill Ackman, actually pioneered the use of the universal ballot in Canada in Pershing Square’s successful proxy fight with Canadian Pacific. Ackman had originally pushed for a universal ballot at Target and we agreed on the strategic advantages it presented from a dissident perspective in terms of providing flexibility to shareholders and increased visibility into vote results.
Boards should be aware a universal proxy slightly tips the balance away from them and can be used as an activist-friendly tool. A universal proxy may create a greater chance that dissident nominees who get elected as shareholders do not have to choose between voting for only management nominees and voting for only dissident nominees. Shareholders hesitant about full-scale change can “send a message” by voting for a dissident or put the board on a short leash by placing some—not all—activist nominees on the board.
In this new paradigm, director recruitment and slate design for boards will become increasingly important as expertise will be comparative and final board composition will be unknown. Boards should be aware that the mix-and-match approach can result in an ineffective mix of directors—you could find that some directors may not want to serve in a room of activist nominees. However, who knows where this proposal stands under the new government.
Skroupa: You have made the point there is a strong correlation between the relationship a board has with its shareholders and the success they have in a contested situation or fending off an activist. What can boards be doing now to ensure they are optimally positioned?
Freedman: In short, talk to shareholders to build up personal capital, grow support for the company’s story, and increase confidence in the oversight role the board plays. Gaining the trust of shareholders doesn’t happen overnight. It grows slowly through an ongoing commitment to transparency and openness. Tone from the top is important and in today’s complex governance environment, the message needs to be sent that your company has a culture where shareholder voices matter—and not just when there is a problem. Year-round shareholders need to know there is a conduit to the board, should they need it.
In order to form the basis of a targeted shareholder engagement program, it is important to not only identify the shareholders you want to meet with based on criteria like share position, but to understand their policies, practices and voting history. The accuracy of your information and precision in outreach can help you receive the required support level at your AGM or represent a key competitive advantage in a transaction or proxy fight.
One of the most convenient setups we have seen for board-shareholder engagement is to have directors invite shareholders in the day after a board meeting when directors are already prepared and gathered for a series of back-to-back meetings. Even if shareholders decline, the fact your board has shown a willingness to meet will be remembered.
The one caution we offer clients is that shareholder engagement cannot be a one-way, one-and-done communication. It is crucial there is a relationship that is formed that provides the opportunity for the company to follow up on actions that have been taken to address concerns and, if they haven’t, the reasons as to why. Shareholders want to know their opinion matters and voices are being heard. Without this important report-back step, a trusting relationship cannot flourish.
Christopher P. Skroupa is the founder and CEO of Skytop Strategies, a global organizer of conferences.