‘When it rains, it pours’ might be the mantra for companies trying to weather a downturn only to find that they’ve become the target of a shareholder activist. Many experts believe that tough economic times lead to an uptick in activism simply because poor performers are so easy to find.
Ian Robertson, executive vice president, communication strategy, at Kingsdale Shareholder Services, puts it this way: ‘When the market is good and returns are coming in and everyone seems to be happy, companies have more wiggle room to make mistakes. Investors are a little more tolerant of some of the shortcomings of management.’ He continues: ‘Conversely, when the market gets tighter and things start to go down, their tolerance wanes.’
Robertson points out that the strong American dollar is leading some US activists to ‘think there are good buys up here.’ He also says that while activists realize they cannot do much to address the problem of dismal commodity prices, they are still pushing to influence M&A activity.
In addition, shareholder activism in Canada is increasingly viewed as a positive development by investors. When asked as part of IR Magazine’s 2016 investor perception survey: ‘Is shareholder activism generally good or bad for long-term shareholder value?,’ 55 percent of investors surveyed answered ‘good,’ while just 15 percent said ‘bad.’
Of course, not all companies will find themselves activist targets in a market downturn. The greatest challenges are typically faced by companies perceived to be overpaying a CEO or otherwise signaling that they’re out of touch with shareholder sentiment, says Robertson. He describes a shareholder base that’s become more antagonistic to management as a ‘Petri dish for activism.’
Ways to Avoid Becoming a Target
Calgary-based Agrium was targeted by activists not once, but twice, in the past five years. In October 2014, just 18 months after Agrium fended off Jana Partners, ValueAct Capital Management was revealed to have acquired more than five percent of the company’s shares.
Therefore, Robert Downey, vice president of investor and corporate relations for Agrium, speaks from experience when he recommends ‘putting on the lenses of an activist’ to identify potential threats.
Downey urges IROs to take stock of their companies’ strengths and weaknesses to understand how an activist might view them. If shareholders are concerned that a company is not buying back enough shares, sensitivity to that concern should inform an IRO’s communications.
‘It’s important for a company to understand where it might be vulnerable when preparing anything from a communications standpoint,’ says Downey. ‘You might write something slightly differently, or choose different words, in order to counter whatever an activist’s argument might be.’
Kingsdale’s Robertson points out that Say on Pay votes and executive compensation, more generally, are often lightning rods for shareholder discontent. ‘You want to make sure your shareholders see you’re feeling the same pain that they are in a down market,’ he explains.
Finally, Robertson recommends that IROs communicate thoroughly and consistently about a company’s long-term strategy. ‘If management isn’t clearly communicating about how to create value, you can bet someone else will step in and fill that void,’ he concludes.
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