With the Covid-19 pandemic, general economic activity is at best limited and at worst shut down, companies fear for the health of their workforce, and workplace interactions look like the opening credits of The Brady Bunch.
Although many companies are focused on stemming the financial free fall as they see both their earnings and valuations plummet to unfathomable depths, they must also begin formulating a plan for a post-pandemic world that not only lays out a blueprint for recovery but also addresses the possibility that activist investors may come knocking.
Corporate activism is in uncharted territory. While some activists have stood down from their campaigns or adopted a more conciliatory stance, others are continuing to wage aggressive battles. If we look to the past as a predictor of the future, activist investing rose significantly after the 2008 financial crisis, although it is increasingly unclear if that crisis is an appropriate model for the current one. However, activists do not profit by standing idle, and corporate activism had another record-breaking year in 2019.
According to Activist Insight’s 2020 Activist Investing Annual Review, more than 800 companies were targeted worldwide in 2019, with 470 of them being in the U.S.; of those targeted, 258 were labeled by Activist Insight as “high impact.” Ninety-seven proxy contests were launched in the U.S., with 35 of them going to a vote. In addition, 117 settlements occurred before a proxy fight was launched, with activists placed 231 directors on U.S. corporate boards.
Corporate, Social Responsibility
Pre-pandemic, activists found new acceptance among institutional investors as they focused on unlocking value, creating efficiencies, and operating in a global environment with a focus on corporate and social responsibility governance issues. In what might be seen as a direct response to this trend, in August 2019, a group of 181 chief executives signed a “Statement on the Purpose of a Corporation” affirming that the largest corporations in the U.S. have a “fundamental commitment” to “all stakeholders,” including customers, employees, suppliers, communities, and shareholders.
Post-pandemic, both activists and shareholders will be forced to confirm their commitment to some of their pre-pandemic rhetoric. With lower market values and shrunken valuations, large cap corporations could be attractive targets for activists, who may simply make a value play or, more likely, may use the Covid-19 crisis to make their case as to why a change is needed. More limited access to capital markets and pressure from their own shareholders may increase the pressure on traditional activist funds.
For their part, corporations will face their own pressures. While they will likely claim that was impossible to predict the pandemic, that will not stop their leadership from being judged according to their response to it. They will likely be scrutinized, not only by outside investors, but also by lawmakers who have placed strict requirements on corporations that are seeking government assistance during the crisis.
This confluence of events provides a unique opportunity for boards to exercise good judgment and leadership as well as substantiate the notion that corporate boards truly prove their worth during a crisis. The Covid-19 pandemic will provide ample opportunity for leadership to show effective stewardship through this unprecedented time.
It might be easy to overlook preparing for corporate activism during the current health crisis, basic safeguards will go a long way toward ensuring that senior leadership and the board can focus on post-pandemic recovery instead of facing unwanted distractions.
To this end, corporate and board leadership should:
- Assemble an activist response team comprising internal and external resources, including legal, financial, and investigative advisers, to prepare for possible shareholder engagement.
- Prepare a pre-engagement plan that anticipates interacting regularly with shareholders, regularly assesses the company in an “activist” light, and creates a process for establishing an early warning system for possible activist engagement, part of which could include performing due diligence on investors that take an interest in the company.
- Create an updated response plan in the event of unwanted overtures that details questions and answers from management, including statements describing actions taken in response to the pandemic; assigns responsibility for approving messaging; and establishes a protocol for updating the board.
- Engage with shareholders on a regular basis, revising strategic communication and paying particular attention to new shareholders and to new concerns raised by longtime shareholders.
- Ensure the board and senior leadership is well prepared. This includes ensuring that the company has an updated succession plan, that members of the board are versed in corporate bylaws, and that both board members and senior management are prepared to answer a variety of shareholder questions and can address the company’s ability to survive the health crisis.
In these uncertain times, an attack on an organization’s board of directors or its management can create an unnecessary and possibly fatal distraction from a corporation’s attention to its post-pandemic recovery. The degree to which a board of directors and a public company anticipate and are prepared for activist engagement may not only have an impact on the direct outcome of the engagement but also on the fate of the company as a whole.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Lisa Silverman is a senior managing director at K2 Intelligence FIN. She has spent her career conducting multi-jurisdictional investigations ranging from complex frauds, to asset searches, to due diligence for corporations and government agencies and is known for her corporate activism expertise, working with attorneys, hedge funds, and companies to enhance their legal and business strategies.