Rethinking Investor Engagement in a Time of Surging Activism
The first IPO in the United States took place more than 200 years ago. But the scope of today’s Investor Relations (IR) department is a more recent invention. Today’s IR department is led by an Investor Relations Officer (IRO), typically the CFO or an executive reporting to the CFO, who works under tremendous pressure. IROs operate in an age where a single corporate announcement may create billions of dollars of value—and a single misstep can wipe away that value in an instant. Add in the potential impact of around-the-clock media coverage, third party social media posts, and 100-page PowerPoint presentations from activist investors, and it’s easy to understand why today’s IROs face numerous stressors.
Perhaps there is no greater stressor than activist investor campaigns. Elliott. Starboard. ValueAct. JANA. Icahn. Third Point. Trian. In 2018, these activist investors charged into the corporate boardrooms of Nielsen, Symantec, Citigroup, Pinnacle Foods, Cigna, Campbell Soup, PPG Industries, and other companies seeking to alter governance, capital allocation, and M&A. As activism surges, proactively rethinking investor engagement is moving from a “best practice” to a necessity.
Here are 5 practical IRO best practices for anticipating, detecting, and effectively responding to activism.
1. DOCUMENT & COMPLY WITH KEY POLICIES
Rule 10b-5, PSLRA, Regulation FD, Sarbanes-Oxley, and Regulation G. The myriad of laws, regulations, and rules for public companies is mind-numbing. Or is it?
In practice, companies may afford themselves substantial protections by thoughtfully crafting, and periodically reviewing, key policies on the following matters: external communications (e.g., authorized spokespersons, permitted channels, and internal approvals); confidential information; guidance; and insider trading. Of course, crafting and reviewing policies isn’t enough—companies must follow them. Therefore, IROs should ensure that these policies are integrated into corporate compliance regimens.
2. DEVELOP A FACT BASE
Companies should develop—and maintain—a fact base that pulls together information on investors, analysts, employees, customers, suppliers, and media contacts. This fact base is central to the IRO’s efforts to anticipate, detect, and effectively respond to activist investor activity. To illustrate why, consider how a company might respond to an activist’s demand for the return of 50% of available cash if the investor base is dominated by long-term investors seeking consistent stock appreciation and dividends with minimal risk. Now, imagine how the same company might respond if it knows the investor base is dominated by activist investors.
3. CREATE A PLAN
There are countless reasons to create an IR plan, and activist investors are a big one. Yet IR plans seldom address the specific risks and opportunities posed by current or potential activist investors or include scenario-planning for how negotiations could play out.
To create a robust IR plan, start by making strategic decisions on which investors and analysts the company will target; then, set achievable goals. From there, identify the required activities and deliverables, draft an IR calendar, and build a detailed budget. The IR calendar should provide clear accountability for each deliverable and highlight critical interdependencies. Inevitably, frictions between the IR calendar and corporate budget guidelines will arise. When they do, take the time to identify and evaluate trade-offs (e.g., opportunities for insourcing and outsourcing).
4. HOLD “INVESTOR DAY”
“Investor Day” is not the Annual Meeting of Shareholders. Investor Day is a separate day on the IR calendar that highly successful IR teams utilize, annually or periodically, to synthesize strategies, operating plans, and financial plans into a compelling story for investors and analysts. Investor Day, if well-planned and -executed, is also an opportunity for companies to reduce their exposures to potential activist investor campaigns or respond to activists’ claims and plans.
Investor Day preparations should begin 6 months out to ensure adequate time for publicity, event planning, content development, and rehearsals. The typical Investor Day lasts 4 to 8 hours. It features 6 to 8 presentations by the CEO, CFO, other CxOs, and business unit leaders, and it concludes with a hefty Q&A session that gives the audience direct access to executives. While Investor Days vary in formats and formalities, each one ultimately reflects company culture and leadership. In addition, Investor Days routinely provide insights on strategies, business plans, capital allocation, personnel, and other matters that cannot be discerned from press releases and conference calls.
5: TRACK AND COMMUNICATE PROGRESS
Like any business plan, your IR plan will require you to track and communicate progress against targets. Typically, the CEO or full leadership team will receive monthly updates, while the Board will receive quarterly updates. However, during activist investor campaigns and other inflection points in the business, weekly, daily, or even semi-daily updates can be appropriate.
THE GOOD NEWS
Activist investors are here to stay. The good news? Most activist investor campaigns result in a settlement, and companies can anticipate and plan for activist campaigns with a few simple steps. With that in mind, are you ready to rethink investor engagement in a time of surging activism?
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