Shareholder Activism

This post was originally shared on LinkedIn and is republished here with permission.

Shareholder activists are certainly making their mark on the boardroom. As of early September, there were 263 activist campaigns in the U.S. And 224 U.S. public companies were targets of activism. While many companies and their boards still fear being in an activist’s crosshairs, it turns out that many directors say activism can actually be a good thing — for them and their companies.

Findings from our recently released Annual Corporate Directors Survey highlight how activism is changing what’s going on in the boardroom. We heard from nearly 900 directors in our survey, and a whopping 80 percent of them told us that hedge fund activists compel companies to more effectively evaluate their strategy, execution and capital allocation. Taking that one step further, nearly 80 percent say that activism has resulted in companies improving their operations and capital allocation.

For some, this might not be terribly surprising. Over the past several years, we’ve seen activists intervene at some iconic U.S. companies, resulting in changes at the CEO and board level. However, hearing the directors who play such a critical oversight role acknowledge these benefits of activism is a significant point indeed.

Activists too focused on the short term?

Still, when we talk about hedge fund activists, the first thing that comes to mind is their perceived intent for short-term gains. In fact, 96 percent of the directors we surveyed say that activists are too short-term focused. So which is it: Are they good for business or are they focused on short-term gains? The reality is that they can be both.

Activists have been accused of many things that have branded them as short-term focused. Some say they get into a stock just to stir up attention, drive up the price and then jump out for a short-term gain. They’ve been accused of pushing for a long-shot acquisition or merger that ultimately doesn’t get regulatory approval just so they can benefit from riding up the stock in anticipation of a merger.

But when we think of activists and short-termism, the primary focus is on capital allocation plans. According to the directors we surveyed, many of their companies have made changes to their capital allocation strategy to respond to actual or potential investor demands. Almost half of them said they increased share buybacks, and 38 percent said they initiated or increased dividends. This illustrates the balancing act companies and their boards must do to focus on long-term value creation while keeping investors happy along the way.

How companies can respond

Some of the capital allocation conversation might get down to transparency, communication and the company’s strategic plan for long-term value creation. Rather than just passing out cash in order to appease certain investors, companies should focus on having a robust shareholder engagement plan to ensure that investors buy in to their long-term strategy and the capital allocation plan necessary to support that vision.

Certainly, most investors would not encourage short-term spending that would undermine the company’s ability to meet its long-term strategic goals if, in fact, those goals had been well-articulated and understood by investors and those investors supported the long-term plan.

Understanding your shareholder base and having a focused dialogue with influential investors may be the best way to get broad support for a long-term plan against any short-term pressures. If companies are transparent with their investors and responsive to their suggestions and concerns, shouldn’t that alleviate any perceived pressure to distribute cash as a defensive mechanism? This will motivate the activists to focus on those companies that are still muddling around with their strategic plan and can’t seem to get their investors on board. And, according to the activists, there are still plenty of those around.

For more insights from our Annual Survey of Corporate Directors survey, visit our website. Follow me on Twitter @Paula_Loop.

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