The request to “get your tanks off my lawn” came from UK prime minister Harold Wilson to trade union baron Hugh Scanlon who was threatening various strikes in the 1960s. It may also capture the initial reaction of a board chair when told that an activist investor has purchased a block of shares and is seeking a meeting and demanding changes.
An activist investor is a shareholder who thinks they have a better plan than you do to achieve corporate success. At the very least their reason for contacting you is an implied criticism of your management’s capabilities, likely it is also a disagreement with your board’s stated strategy and at worst it is a condemnation of you personally.
The attentions of an activist puts the board chair in a particularly difficult position. Almost inevitably they will be looking to pressurize your executives into doing something they don’t want to do and indeed maybe seeking to have those executives removed. Part of the role of the chair is to listen to, and act on, shareholder concerns. But these are normally friendly observations coming from a supportive long-term fund managers whose developed view of the world is probably similar to your own. A marked contrast to the unsought instructions from an aggressive investor with an attitude and an angle.
Boards complain that most shareholders are unengaged and uncommunicative but when faced with a Cevian, Crystal Amber, Elliot or Gatemore in full cry they may come to prefer the quiet civility of the traditional more passive long-only institution. Activists tend to be noisy and they make good newspaper copy. They also can make things happen.
Activists are not always bad news, they are frequently correct in their observations. They will have done a lot of work and will have a thesis about better ways to create value. Sometimes it is selling off a slow-growing subsidiary which is depressing overall equity value. It maybe doing an IPO of an overlooked business unit or selling to private equity to get a better valuation. It can be jolting the board to replace underperforming management.
Of course they are not always right. And what one shareholder might want for their fund’s objectives can be directly opposed to the desires of others. The classic challenge arises from the different strategy of yield funds who want dividends and growth investors who want capital gains.
I was harassed for a couple of years, as chair of the publisher Future, by a fund manager who had, in effect, promised his clients regular dividends. Future’s board had decided we needed to conserve our cash to invest in digital transformation. It was a classic short-term/ long-term tradeoff. As the board were unanimous and we did not want to change our approach I told the shareholder if he desired dividends he should invest in a business which wanted to operate that way. It was not so much he was wrong, simply he had different objectives. In retrospect my mistake was not being much clearer in issuing signals, years before, that the company saw itself an investing for growth not delivering yield. Having a clear and consistent narrative can avoid such misunderstandings.
But when the activist call comes, and if you have been a chair long enough it will come, do you leap to the support of your management or do you concede mistakes and weaknesses? In my early years of being a chair I tended to opt for the aggressive “our team is in the right…if you don’t like it sell your shares” approach. But after years of activist approaches – some very well thought out - I have come to the conclusion it is always worth having a conversation. Listen and learn.
Some activists are charming, other choose a much more belligerent stance. A few years ago I took over as a chair of a business only to be called, the day after the announcement , by the largest shareholder who told me, in no uncertain terms, that he was not happy with my appointment and presented me with a list if all the things the company was doing wrong and what he wanted done to fix them. He made it clear that he would seek to remove me unless he got his way. Naturally our relationship was fractious from the outset but after a few weeks it was clear to me that some of what he wanted made sense and ultimately we did do most of it. After the share price had more than doubled he sold his entire stake and we arrived at a more cordial, if more distant, relationship.
So my conclusion is that if an activist gets in touch always take the call, always have the meeting and give real consideration to their ideas. If your board agrees then take the actions suggested – or at least some of them. If after a year or two the share price has gone up you can always take the credit. On balance activists are probably on the same side as you – particularly if you take your director’s fees in shares which ideally you will.