This post was originally shared on LinkedIn and is republished here with permission.
In my role as the leader of PwC’s Center for Board Governance and the Investor Resource Institute, I have the pleasure of talking to a fair share of CEOs. A conversation typically starts with talk about their business, but given my corporate governance role, I’m always interested in their experiences with activists.
There are many different types of activism and activists are not all the same, each having different time horizons or strategies, and comments about activism can be all over the place. Still, I’m wondering whether every Board might need an activist—or at least whether they should be thinking like an activist, critically looking at their businesses as an activist would to understand what risk factors might attract an activist. I draw upon two recent meetings I have had with CEOs.
The first CEO I met with had a fair amount of experience with activists over a period of time. He seemed to imply that he found them to be a nuisance and overrated. He said they would dip into his stock, ask for meetings, weigh in and then move on. He didn’t find them particularly well prepared or insightful. And he noted that they must not have had that many great ideas because they ultimately went away and left him to continue running the company.
The second CEO had a different reaction. He was not at all concerned about activism having a negative effect on his company. In fact, he said he enjoys working with the activists on his Board and seemed to have embraced all elements of activism. In his case, he has some real, live practicing activists on his Board—individuals with private equity backgrounds who spend their careers buying and selling companies and looking opportunistically around the market. The Board has really listened to their ideas and about how to unlock shareholder value and tapped their expertise about the business, he said.
He also said that every company and Board should be thinking like an activist—and if you don’t have one on your Board, you either ought to go out and get one or you should designate someone on the Board to play that role. He believes it’s the only way you can stay two steps ahead of what is going on out there—and that’s the only way to succeed in a dynamic and fast-moving market.
I asked him how a Board could achieve the same result if it doesn’t have a professional activist in-house. We concluded a few things: First of all, you need Board members who are comfortable being a contrarian or devil’s advocate. In order to push back on the company’s strategy and challenge the CEO, for example, you need directors to be comfortable with their own thoughts and knowledgeable about the market and, in particular, the company’s industry. Industry skills and knowledge are important elements to have on every Board, so when the Board members with the deep industry skills speak, everyone listens.
What about contrarian or diverse views coming through gender or racial diversity? While I couldn’t really get him to focus on this point, he did acknowledge that diversity in general—which could include gender or racial diversity—is important to get different thoughts on the table and stimulate discussion with different perspectives.
Both CEOs thought their approach was working well, and they were quite confident in their positions. This wasn’t surprising, since CEOs are generally strong leaders and should have a fair amount of conviction about their views. The first one thought his team was smarter and more knowledgeable than any activist could be, and the second one thought that he had discovered the secret to success by putting an activist on his Board.
I don’t think I’m in a position to say which approach is better, but the CEO who was supportive of activism was delivering longer shareholder returns over a multi-year period. What is that saying about keeping your friends close but your enemies closer? Maybe it means that every Board could benefit from at least thinking like an activist.
For more on this subject, view PwC’s recent paper: Shareholder activism: The who, what, when, and how or try out our Shareholder Activism Risk Assessment Tool.