The boardroom is a one-sided boxing ring, where an activist must take a stand against the opposing board members. However, through a percipient strategy an activist can work to persuade the board in their favor.
“An activist can attempt to redirect a board by obtaining board representation or from the outside,” says Eric Rosenfeld, Chief Executive Officer & President, Crescendo Partners L.P. “One is more likely to be successful from inside the boardroom, but it requires more effort.”
The job does not get any easier for activists once they have board representation. The fight only gets harder if the board member continues onward in a lonewolf effort against the majority.
“Once on the board, whether through negotiation or as a result of being elected, a major factor governing what tactics to use is the amount of board representation the activist has,” says Rosenfeld. “A lone board member will generally face a tougher task, think Twelve Angry Men, than if the activist has a significant majority. Obviously, with a majority of the board, redirection is simple.”
Before the fight can even begin, the activist should know the dynamic of the boardroom inside and out. Not only will they know what to expect, but they will also be able to plan their strategy for persuading the board more efficiently.
“The first step is to understand the political forces affecting board dynamics. It is necessary to understand how and why each board member came onto the board, whether there are different camps on the board and what are the motivations and alliances of each board member,” says Rosenfeld. “It can be quite helpful if the activist can enlist the aid of an existing sympathetic board member.
“The next step is to allay the preconception the board may have that the activist and his or her nominees are reckless and ill informed. Thorough research, an intimate knowledge of the company and the use of data, including reading past board books, will help. Knowledge is a very powerful tool and the activist needs to quickly get up to speed to have the same set of information or if possible, more, than some of the existing directors.”
Time is everything for activists, and they have to be able to learn as much as they can in the shortest amount of time possible. However, the pressure can be viewed as an accelerator in the fight for support. The sooner an activist knows which board members to target for support, the easier their fight will be.
“Third, the activist’s knowledge of the views of unhappy shareholders can be used to help sway the board’s position on different matters,” says Rosenfeld. “Presumably, the activist has received significant shareholder support and that may be taken as a mandate for a catalyst for change.”
Finally, it is important for the activist to remember that the battle is engaged solely on the inside of the boardroom. Understanding the situations that other activists are facing can help turn the tide, giving the advantage to the activist with the most knowledge.
“Fourth, the prospect of another proxy battle may help to influence the views of directors. Unless change is evident and progress is achieved, the activist may gain more allies on the board in a year or less,” says Rosenfeld. “The other directors should understand this dynamic.”
Providing an activist takes these steps, they work to make their minority position on board to a majority as they seek to accomplish their goal.
“In a minority position on the board, an activist needs to gain the support of other board members. These are some of the ways to accomplish that goal.”
Rosenfeld will be a panelist in the It Only Takes Two: The Latest Tactics Used by Activists to Redirect a Board discussion at the Global Shareholder Engagement & Activism Summit on Sept. 28-29, 2017.