On the morning of Tuesday, October 14, 2014, a group of Board Leadership Conference attendees joined Alan M. Klein, Partner, Simpson Thacher; Jamie S. Moser, Partner, Joele Frank; and moderator Chris Ruggeri Principal, Deloitte for a power breakfast session entitled “Balancing Shareholders and Capital Markets”.
It is well known that there has been a rise in shareholder activism over the last few years. There are more than 400 activist funds today with more than $100 billion under management. If viewed as an asset class, activist funds are a top performer. Money flows to where it can generate the largest return, and activist-backed funds have flourished. In turn, panelists observed that this has emboldened shareholders of all stripes. In their quest to have a more prominent voice in how companies are run, these investors have changed the dynamics of company-shareholder interaction.
There are many different kinds of shareholders ranging from professional, established investors to newer, smaller entrants into the market. Moser believes that some larger organizations that tend to maintain long-term positions in companies can be considered activists as well. While they prefer not to run campaigns on their own, they feed ideas to others who will. Klein noted, “In a sense these ‘long only’ funds have outsourced their activism”.
Panelists noted that activist shareholders don’t pick targets lightly. They spend a significant amount of time drilling down into companies, and have a surprising depth of knowledge. As such, it would be a mistake to disregard them or view them as superficial. Nevertheless, there is often a mismatch between the way those who run companies view their businesses and the perspective of many activists.
Governance issues can be used as part of a shareholder’s demands. Although they are not typically the crux of an activist fight, these issues can become part of the story and set the tone. For example, panelists cited topics such as related party transactions or sluggish board turnover as “low hanging fruit” for shareholders. Even if these issues have been properly disclosed, a shareholder may use them to put the company on the defensive.
On the other hand, some investors – particularly the more well-established fund – ask for reasonable conversations with the board and management. Panelists observed that if directors can demonstrate to them the validity of the current plan and why their thesis is wrong, some investors may listen or even back off. That being the case, engagement is extremely important.
It is critical that directors understand the perspective of the company’s shareholders. The first question Moser asks a company is, “When’s the last time you spoke with your top 10 shareholders?”
Further, the board should engage with shareholders for the first time outside proxy season, when the discussion is often centered around voting. Then, if a proxy contest starts, the company can reply “our board has been speaking directly with shareholders; we’ve been active and engaged.” Meetings between the board and investors should demonstrate transparency and openness. Directors can simply ask investors, “what’s on your mind?” Of course, panelists noted that it is important to remain conscious of Regulation FD; avoid the discussion of material items in a one-on-one setting.
Boards can also go beyond annual “deep dives” to ensure the current strategy is still viable. For example, Klein suggested that boards invite a banker to give a presentation, valuing the strategic plan and showing how it stacks up to strategic alternatives. If the board has conducted this type of analysis, they are more able to speak to the current strategy’s strengths and how it will produce the most value for the company. It is also important that the strategic plan for the company is communicated in the most compelling way possible. “The first three-quarters of any ‘fight letter,’” Moser noted, should be about strategy – how your strategy provides more value than what the shareholder is proposing.”
Activist Investors on the Board
Finally, the panel discussed how boards can work with new activist directors once elected to the board. Klein noted that most activist situations today end in a negotiated outcome: Either a proxy fight doesn’t start, or the fight may end before it ever gets to a vote. Typically, as the result of a negotiation, the shareholder ends up with one or two seats. If these new directors can make their case in a logical manner, a fresh perspective may prove beneficial for a board.
Ultimately, panelists agreed that there has been a sea change regarding how companies and their shareholders interact. To the question of whether activism is good or bad, the answer is “yes”– it depends on facts and circumstances.
It’s a mad, mad, mad, mad world—to echo a movie title from a half century ago—but it’s also a good one when nations cooperate. This is the big takeaway from the global track at NACD’s 2014 Board Leadership Conference, where representatives of nine nations convened to create a global village and to host a series of three staged programs.
The village itself featured colorful, information-rich booths where representatives from the embassies and consulates of Brazil, Canada, China, Germany, Ireland, Malaysia, Mexico, and the Russian Federation greeted trade-minded directors seeking to expand their knowledge.
In addition, the village featured a booth for the Global Network of Director Institutes (GNDI), a network of 12 director institutes (including NACD) and one confederation (ecoDA, in Europe). The GNDI booth offered an opportunity to meet incoming GNDI Chairman Stan Magidson, CEO of the Institute of Corporate Directors (ICD) from Canada; Paul Chan, the acting CEO of the Malaysian Alliance of Corporate Directors; and Simon Arcus, manager, Governance Leadership Center, Institute of Directors, New Zealand. Vicki Jordan, vice president of marketing, ICD, joined me in staffing the booth—a truly appropriate choice, as Canadians/les Canadiens are global by nature. For proof, see this new video produced at Laval University in Quebec (featuring yours truly) created for an exciting new ecoDa educational program also held in October.
The Global Village was home to a series of panels in the Global Track at the Conference. This blog offers takeaways for these dynamic panels.
Global Panel 1: Trade and Business in North America
Moderator: Dean A. Pinkert, vice chairman, U.S. International Trade Commission (USITC). Panelists: Gilles Gauthier, minister, Economic Affairs, Embassy of Canada; Francisco J. Sanchez, chairman, CNS Global; former under secretary at the Department of Commerce.
Know your trade agreement. A well-known example of a free trade agreement is the North American Free Trade Agreement (NAFTA), now 20 years old, which has been a success for all the economies This is why it is important to support the new and emerging free trade agreements of other regions namely: Transatlantic Trade and Investment Partnership (TTIP), and the Trans Pacific Partnership (TPP).
Give bipartisan support to good trade agreements. Although free trade is often associated with the pro-business Republican party and opposition is often associated with the pro-union Democratic party, good trade agreements such as NAFTA get bipartisan including union support—especially considering that one can always seek a trade remedy to cure imbalances.
Think beyond tariffs. If trade unfairness arises, a variety of trade remedies are available. Tariffs—charging duties on imports—are only one way to correct imbalance. Even more constructive is regulatory cooperation and harmonization of standards.
Tell your company’s story so stakeholders and the public will understand. Reatha Clark King, chair of the NACD board of directors, noted that boards need to do a better job of ensuring that companies are more forthright in disclosing information about their global nature: where they are headquartered, where they employ people, where they source their products, and where they sell their products, among other topics. By revealing their global nature, they will build more informed support for free trade.
Global Panel 2: Translating Corporate Culture Across Borders
Moderator: Dennis Whalen, partner-in-charge and executive director, KPMG’s Audit Committee Institute. Panelists: Orlando Ashford, director, ITT Corp., Executive Leadership Council, and Streetwise Partners; senior partner, Mercer; Michael Marquardt, director, Commonwealth Trust Co., Delaware Theatre Co., American Cancer Society (South Atlantic), and CEO, Global Compass Strategies Inc.
Live “la vida local.” Many companies think locally and act globally, when they must do the opposite. As a company, value your local talent; as an individual, live your local life. Companies acquiring outside their borders used to send in executives from headquarters. Now, they are more likely to hire and promote locals—including expatriates who want to stay longer on an assignment.
Check your culture and mark your calendar. One of the best examples of culture arrogance is when we are oblivious to non-U.S. national holidays. Not all are marked on global calendars. For example, don’t try to schedule a meeting in Berlin on November 9 – when the fall of the Berlin wall is commemorated.
Focus on outcomes. When two companies get combined, focusing solely on process may result in getting buried in protocol. Instead, focus on desirable outcomes—for example an effective workplace. This was the case for Orlando Ashford when he learned that as a matter of policy, a particular non-U.S. division of a U.S. company had collected information on blood type, then run a blood drive for an employee’s relative, and published the results, causing some disharmony at work. He changed the policy.
Insource HR. It may be tempting to ask a local company to hire your talent but it is worth your own time. While professional support can be valuable, human capital is too important to leave entirely to third parties.
Know your agents. Enacted some four decades ago, the Foreign Corrupt Practices Act (FCPA) does hold companies—and, by extension, boards—accountable for certain internal controls. Directors should ask for assurance from management that the people who are involved with selling the company’s products and services act within the boundaries of the law.
Global Panel 3: The Global Start-Up Revolution
Moderator: Andrea Bonime-Blanc, chair, Epic Theatre Ensemble; audit chair, Counterpart International; CEO and founder, GEC Risk Advisory. Panelists: Andre Averbug, founding partner, Rankpad Consulting, Inc.; Mark Little, CEO and founder, Storyful; Bernard Moon, cofounder and partner, SparkLabs Global Ventures.
Be “hyper-transparent.” In the new economy, “reputations can be lost or improved overnight.” Learn what the market wants to know about you and provide that information as soon as possible.
Look around you. Any place and every place can fuel a start-up revolution. Berlin, Dublin, Nairobi, Seoul, and Tel Aviv are all current examples. Places with a long-established rule of law are ideal for startups, but no place is off limits. In these unexpected places, new ideas are finding the capital they need to become viable businesses—often in areas that do not require a large amount of funds to launch. (Cost of entry in technology-based businesses is generally lower than in traditional industries that require manufacturing plants, for example.)
Respect Silicon Valley—and look beyond it. Silicon Valley is rightly known for the entrepreneurial ecosystem so important in the second phase of growth—a system that includes both financial capital (venture cap, angel investors, banks) and intellectual capital (fellow innovators, universities), not to mention savvy law firms. But such ecosystems are evolving elsewhere as well.
Fail better. Don’t be afraid to start a business that may fail. Panelists noted that in the U.S., bankruptcy laws can be relatively forgiving. In locations where the bankruptcy laws are harsh, changes may be under way, and adaptations are possible. Also, remember that you need not go it alone. In a climate where the new form of research and development is mergers and acquisitions, a possible option may be to sell your start up to a larger company before a lack of funds brings the company to a halt.
Give back. If you develop a successful startup, consider investing at least part of it in other new ventures, the way Google and Facebook founders have done. You can keep the global start-up movement going. Vive la revolution!
It should go without saying that governance in today’s complex business environment is no walk in the park. But are there lessons to be learned from a run in the Sahara? At the recent 2014 NACD Board Leadership Conference, documentary filmmaker Jennifer Steinman aimed to provide the answer to that question in a session titled “Going Beyond: Stories of Pushing Past Personal Limits.”
In the session, Steinman told the story of the creation of her latest film, “Desert Runners,” which follows people who take on the formidable challenge of competing in the 4 Deserts Race Series (4 Deserts). 4 Deserts includes a series of four ultra-marathons: races involving distances greater than the 26.2 miles that compose a typical marathon. The races take place in some of the most inhospitable environments on earth, including the Sahara, Gobi, and Atacama deserts, and Antarctica.
Steinman began the film project with a series of questions, including “what are these perceived limitations that we put on ourselves?” and “are these crazy people?” She arrived at the first race expecting to find a group of elite, superhuman athletes, and was surprised to find that, for the most part, the runners were what you might call “everyday” people; people with day jobs, mortgages, and families. Steinman’s film follows four people who decided to take on this challenge. In the course of the conference session, attendees were introduced—through video clips—to three of them: a student named Samantha, age 25; an American consultant named Ricky, age 33; and Dave, a 56-year-old marketing director and friend of Steinman’s who introduced her to the competition. Dave was one of 13 runners attempting to complete all four grueling races of 4 Deserts in one year, a feat known as the “Grand Slam.”
Steinman shared a series of her favorite clips from the documentary, and as might be imagined, Samantha, Ricky, and Dave confronted a wide variety of physical challenges, including dehydration, illness, exhaustion, and a great deal of pain.
So how did all of that tie into directorship? The challenges and struggles of the runners echoed many of the themes emphasized elsewhere at conference.
An injury suffered by Ricky provides an example. Given the long distances and extreme conditions involved in the races of 4 Deserts, some degree of pain is unavoidable. However, as Steinman pointed out, racers must constantly ask themselves, “is this real pain, pain I need to deal with, pain that can do real damage?” If the answer is “yes” to those questions, as it was in Ricky’s case, a runner needs to recognize this and give it the attention it requires. However, if the answer is “no,” any runner who intends to finish the race must recognize this, and avoid attaching more meaning to the pain than is merited.
As part of risk oversight, directors also receive an overwhelming amount of urgent information from a variety of sources, and must contextualize it on the basis of their own experience so they can ask the right questions of management. The board should ensure that the risk oversight processes in place have the capability to differentiate between a real threat and the intermittent challenges that occur in the normal course of business. When a real threat is detected, a director must not let pride get in the way of taking the appropriate actions, as the consequences could become progressively worse.
Another of Steinman’s film clips showed a series of gruesome injuries suffered by runners. Watching the clips quite naturally might cause one to wonder why anyone would willingly participate in such a competition. Steinman found that part of the answer to that stemmed from the camaraderie of being marooned in the desert with a common goal. While a small contingent of elite runners are in the race to win, the vast majority have the simple goal of finishing. Even a relatively competitive person would likely concede that running consecutive marathons across the Sahara or Antarctica is hardly your typical “participation medal,” and many runners rely on each other at times to accomplish this remarkable feat.
In a particularly poignant clip, a professional runner holds Samantha by the hand and they help each other to the next check point. Though they may be significantly different in kind, corporate directors certainly face their own challenges. The reasons directors take on the responsibilities and liabilities inherent in the role are many, but by concentrating on the reasons they are there, and augmenting their own expertise with the expertise of others around the table, each director, board, and company can reach their goals.