Shareholder activism is on the rise and according to Lazards more investors are using activism as a tactic putting increasing pressure on boards to defend their strategy in the face of calls for change.
The activist will typically own less than 10% of the shares and needs to convince another 40% of shareholders that his planned business strategy is more attractive than that of the incumbent board, and will release pent up value. This is an enormous challenge, he must find and motivate the disillusioned from among the institutionally conservative and inherently inert. This is not impossible he only need deal in expectation, trust and confidence rather than fact. A brighter tomorrow and higher dividend is a no-brainer to anyone seeking a better return on their investment.
Meanwhile the company board will be busy contacting all shareholders to secure support. Many of these will not have previously taken much interest in the strategy itself, but will begin to once an activist criticises it and makes waves in the market. The smaller shareholders and proxy voting agencies will be bombarded with information to justify the current strategy, board composition, CEO competence and overall common sense of the status quo. The activist will be portrayed as an ‘asset stripper’, an out and out bad guy, a charlatan whose promises will turn to dust.
The activist need only expose a vein of latent dissatisfaction irrespective of its source, much as the Leave campaign did in the June 2016 referendum. The precise trigger for dissatisfaction doesn’t itself matter because it all hinges on a achieving a majority in a binary choice vote. The activist only need sew doubt and question trust, highlight poor decisions and timidity of action. It is relatively easy for him to show that the incumbent leadership could have performed better because there is always a ready example to support his hypothesis.
Conversely the board will be fighting for their existence and the CEO will want his Chair to wholeheartedly back him against possible defenestration. There will be a huge PR push to rally shareholder support and win a vote of confidence at the shareholder meeting – AGM or EGM. The current strategy will be defended using supporting evidence, selected and presented to demonstrate competence and capability. The status quo will be defended as the safest option for shareholders.
Who wins depends on winning hearts and minds through an effective campaign. The Cameron/Osborne faction on the Remain ticket failed to convince the country they had the right strategy, whereas the Johnson/Gove faction on the Leave ticket tapped into dissatisfaction and promised a brighter tomorrow. They didn’t have to be specific in how this would be achieved, they just tapped into a well of discontent. Conversely the activist shareholder does have to propose a different CEO or strategy, but he also taps into the well of disillusionment and dissatisfaction.
Why is activism increasingly being used as a tactic? It is a vehicle for achieving change that appeals to shareholder emotions like frustration and impotence. It is not restricted by the requirement for proof but lives off expectation and belief. It cuts to the very currency of reputation: character and trust. Once doubts are raised about competence and performance, their spread is contagious. The activist questions whether confidence in a board, once willingly given, is overdue for retraction. The activist has conducted his own due diligence and spotted an opportunity to release value. Invariably a hedge fund, the activist probably has a better understanding of risk than the incumbent board.
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