While the term “shareholder activist” can send a shiver down the spines of corporate directors, there are often positive outcomes from this activity. Janet F. Clark, former executive vice president and CFO, Marathon Oil Corp. and director, Dell, YES Prep Public Schools, Teach for America; Darren Novak, senior vice president, Houlihan Lokey; Brian L. Schorr, chief legal officer and partner, Trian Fund Management; and Andrew E. Shapiro, president, Lawndale Capital Management discuss how and why activist shareholders can be a force for good.
Shareholder activists can take on many forms, and Schorr said activists typically fall into four broad categories: merger and acquisition activism, balance sheet activism, governance activism, and income statement/operational activism—which is the key analysis of his firm. “We want to create long-term shareholder value by focusing on the balance sheet, working closely with management and boards,” he said.
Behind the Scenes Activism
While activists are often making headlines in the media, Shapiro was quick to note the value in trying to engage with a company before going public. “Activism is inherently disruptive and can be costly to stakeholders, directors, and management—and even to activist investors,” Shapiro said. “There is great value in trying to engage with the board and management to resolve issues and determine irreconcilable differences.”
Schorr noted that his firm generally attempts to set up a meeting with the CEO and often a representative from the board to present strategic ideas before going public. “Our goal is to have a voice in the boardroom and persuade the board [that] there might be a different strategy they haven’t considered,” he said.
Activists at the Table
If a board and management are doing their jobs—actively testing strategies, looking at metrics and peer performance, and seeking improvement to increase firm value—they won’t get a knock on the door from activists, Clark said.
If, however, that knock does come, it should not be completely jarring to the company. “If a board is approached by [an] activist with an idea management hasn’t pursued, the activist is doing a positive thing. Management shouldn’t be surprised by concept,” Clark said.
In 2012, initial public offerings (IPOs) did not quite make the rebound analysts had predicted. In the year of the botched Facebook offering, just 128 IPOs were made. Although quadruple that of 2008, this marks a decrease from 154 IPOs in 2011. Last May, the Economist observed that this decline was part of a larger trend: the decline in popularity of the public company.
Since 1997, the number of U.S. public companies has fallen by 38 percent. Additionally, the average number of IPOs has declined from 311 per year between 1980 and 2000, to 99 per year between 2001 and 2011. In addition to companies actively not going public, in the last year several well-known businesses “went private,” such as Quest Software, CKE Restaurants, Burger King, and J. Crew.
In addition to the obvious distinctions of private companies—a lack of shareholders and adherence to regulation—NACD’s recently released 2012—2013 Private Company Governance Surveyfound many lesser-known differences. This survey features responses from over 550 individuals who serve private company boards. Some of the contrasts include:
Private company boards are smaller. On average, private company boards have 7.3 members—a decrease from 8.9 members in 2011. For the past several years, public company boards have consistently maintained an average of 8.8 members.
Public company directors are more likely to receive continuing boardroom education. In 2012, 82 percent of public company directors received continuing education in the last 12 months, compared to 57 percent of private company directors. This may be connected to company policy, however: 83.1 percent of public directors were reimbursed for education expenses, while only 54.5 percent of private company peers were.
Trend in the private company boardroom: D&O Insurance. Additional directors and officers liability insurance was obtained by just 15 percent of private company directors in 2008. In 2012, this figure jumped to 50.4 percent. In comparison, 42.8 percent of public company directors purchased additional D&O insurance in 2012.
Nominating and governance committees are much less prevalent at private companies. Similar to public company counterparts, audit and compensation committees are nearly ubiquitous at private companies. However, just 49.2 percent of private company survey respondents indicated that their board had a committee dedicated to nominating and governance.
Private companies employ different mechanisms to ensure director turnover. The most commonly used method of director turnover at private companies is director evaluation. Age limits and term limits are both used by nearly one-fifth of respondents. At public companies, the most prevalent mechanism to renew and replace directors is age limits, closely followed by evaluations. Term limits are used by just 6.5 percent.
Generally, private company boards maintain less diverse composition. Compared to 27.4 percent of public companies, 38.5 percent of private companies do not have any female directors. With respect to minority directors—based on race and ethnicity—70.3 percent of private companies have no such representation, compared to 51.8 percent of public boards.