Activists complain about deteriorating competitive advantages, weak revenue growth, declining profit
margins and/or eroding returns on capital. They whine about slumping valuation and poor share-price
performance. They often demand for the business to be broken up through spinoffs and divestitures
or for it to stop its acquisitions. And they often insist on massive stock buybacks, sometimes funded
by taking on heavy levels of debt.
They wax eloquently about governance problems like board cronyism and seem to almost enjoy
shouting about what they see as undeserved executive pay. Pity the CEOís children who get teased
and tormented at school because their parent is condemned on TV for making millions in supposedly
undeserved salary, bonuses and stock options.
The threat of an activist appearing in your investor register is very real. If you lead a public company
in the United States, it is guaranteed activists have already evaluated you and your company. If
they donít take action now, they will nonetheless regularly reevaluate your company to see if it fits
their targeted profile. Who would have thought Apple, the third-best performing stock in the S&P 500
over the last 10 years, would attract an activist?
Some executives and directors lose their jobs at the hands of activists. Some companies are broken
up into pieces. Some carry out massive restructurings replete with thousands of layoffs and other
cost cutting. It all seems so threatening and distracting.
But it doesnít have to be. As in sports, when dealing with activist investors, the best defense is a
good offense. To keep activists away, you must be your own activist!
There is plenty an executive team can do to keep activist investors looking elsewhere, but it requires
letting go of some often deep-seated beliefs. Executives must not view the company as theirs, but
as the property of the companyís shareholders. Shareholders are often silent partners. But remember
that any investor can become vocal and exert influence as he or she desires.
If management is truly committed to serving shareholders, it should evaluate the business the way
activists already do and take decisive action to unlock value before activists barge in and force
managementís hand. Being proactive gives management the opportunity to do it right since they
know the company best.
There are five main areas in which management should take steps to keep activist investors away:
1. Improve Performance: Are revenue growth, profit margins and returns on capital adequate in each
major business area? Are there opportunities for improvement? Seek to better utilize all unutilized
capacity, since this can drag down returns on capital. Reduce bureaucracy that adds cost,
complicates decision making and breaks down accountability. Discontinue all activities that donít earn
adequate returns because these are magnets for activist investors.
2. Allocate Capital Better: Do you have the right balance between organic investment, acquisitive
investment, dividends and buybacks? Are investments made in the right areas? Do you invest more
where returns and growth opportunities are high, and vice versa? Activists frequently target
companies that allocate capital poorly.
3. Strengthen Competitive Advantages: Are your competitive advantages adequate to support
growth and sustainability? Do you invest enough in research and development? Brand-building
marketing? Employee training? Weakening competitive advantages cause low valuations and can be
an invitation to activist investors.
4. Separate Unrelated Businesses: Is management distracted by trying to run too many different
kinds of businesses? Are smaller, fast-growing business areas stifled and investing less than they
would as stand-alone companies? Management should separate unrelated parts of the business via
spinoffs or divestitures. Conglomerates tend to grow slower and be valued lower than focused
companies and, therefore, often attract activist attention.
owners? Do they treat the capital of the company as they do their own money? Have executives
been overpaid relative to the performance they have delivered? Activists will rarely enter a stock just
because of poor governance, but egregious compensation and other governance weaknesses can
support their case among other investors and the public.
To successfully serve as your own activist, you must objectively assess your companyís strengths
and weaknesses and diligently pursue improvement opportunities. This can be tough especially when
a CEO or CFO decides to impose unwanted change on friends and colleagues. If you are such a friend
or colleague, remember it is probably better to take action yourself than to have your hand forced
publicly by an activist.