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.
Without a doubt, directorship has changed. In the last 10 years, the effects of legislation and regulatory activity such as Sarbanes-Oxley and Dodd-Frank have significantly expanded the role of the director. Taking into account the current trends of increased shareholder activism, heightened media scrutiny, emerging technologies, and disruptive innovations, it is expected that this role will continue to morph. As these shifts in the economy increase in amplitude and frequency, it is necessary for those in the boardroom to understand and prepare for the future structure of directorship—today.
With this in mind, NACD has launched NACD Directorship 2020 to help directors define and prepare for the emerging challenges and opportunities expected to impact boardrooms in five to seven years. More than an initiative, NACD Directorship 2020 extends from educational programs and roundtable exchanges to published research. Using topics informed by an advisory council composed of boardroom luminaries, academics, and governance experts, feedback from educational programs will shape ensuing research on leading practices for the future. In the coming months, several symposiums will be held across the nation, and the conversation will be continued at our annual Board Leadership Conference in October.
This week, NACD held the first of such symposiums at the Harvard Club in New York City. More than 100 directors attended the afternoon session to discuss two areas: the future state of the risk agenda, and how to select performance metrics that will engender sustainable organizational profit. The symposium was led by NACD President and CEO Ken Daly; Akamai Technologies Lead Director and Audit Committee Chairman Martin Coyne; and former Bell and Howell CEO, current NACD Director, and Northwestern University Professor Bill White. During the highly interactive sessions, questions were posed to attendees who were then able to discuss and provide thoughts among their peers. Takeaways from the event include:
Composition and resourcing is essential to navigating the current and future risks to the boardroom. With the right resources and information and the right people around the table, the boardroom can effectively engage in the critical issues.
Inherent in their role as part-time overseers, directors will always run the risk of information asymmetry: management has the full suite of information about the company’s operations that is then selected and parsed out to the board. The challenge for the board is to communicate its expectations on the type and amount of information it needs for effective oversight.
It is essential that directors trust, but verify. In the boardroom, the culture should be fostered so the executive staff feels they are able to report on the high-risk items and things that keep them up at night. To verify the information presented, directors should go beyond the C-suite, even outside the company. This can include meeting with the heads of business units, or gleaning outside sources of data.
In risk oversight, the board can informally meet with senior management and the internal audit team to develop a list of the top organizational risks. After these risks are identified, the board can have an executive session with an outside expert to gain more knowledge of the areas.
Industry experts on the board may not anticipate the disruptive technologies that have the potential to pose either a huge risk or opportunity to the company. While extremely valuable at the table, industry experts may not always be able to see beyond their acumen. Boards can recruit experts from other industries—who bring the perspective and knowledge of different risks and market forces—to serve as directors.
Total shareholder return (TSR) and financial and operational metrics reflect hindsight. These data can be bolstered with a healthy balance of “early warning” metrics derived from the company’s strategy, such as customer and employee satisfaction, dollar investment per employee, or retention.
Metrics are the operationalization of strategy. If the strategy’s underlying assumptions are flawed, however, the metrics have less significance. Is the board looking at metrics that question the strategy itself? This could include a measurement of the organization’s adaptability changes in the marketplace.
Reputational and stakeholder risk is an area that should receive boardroom attention. Directors should encourage metrics that foster stakeholder engagement as a strategy for risk mitigation.
The long-term health of most companies is determined by its success in being innovative. The company should establish early warning metrics that monitor how its innovation systems generate sustainable cash flows.
The next NACD Directorship 2020 events will be held July 16 in Chicago and Sept. 10 in Los Angeles. Between events, NACD’s blog will feature viewpoints and research from our NACD Directorship 2020 partners—Broadridge, KPMG, Marsh & McLennan Companies, and PwC—that will take a deeper look into the emerging issues and trends that will redefine directorship.