Loving Critics or Critical Lovers?

Duties of the Board

While I’m obviously supportive of fund managers investing directly into companies, I’m concerned with the conflict that activist fund managers create for the company’s board of directors. They don’t seem to understand or care that while the board of directors is responsible to its shareholders, it also has a fiduciary responsibility to the company’s employees and creditors (depending upon its financial condition), and a responsibility to the communities in which it operates. Directors have to balance different stakeholders’ interests in the company, and short-term returns for investors aren’t always the most important thing at any given time.

But when an activist fund manager—or a group of fund managers who join together—starts to pressure management and its board of directors, the board can lose control of the company’s immediate strategic decisions as well as the company’s long-term strategic vision, direction, or mission. That’s not why companies go public, is it?

 

Fighting Back

There are a few things that companies can do to fight back. One of the cardinal rules of crisis management is having laser-beam focus on the priority at hand, so you should create a response team to tackle the problem head on. Members of the team could include a special committee of board members, selected members of top management, securities legal counsel, and investment bankers.

Also, don’t allow your company to be in a situation that attracts this type of investor. In other words, good results speak louder than words. Do your job well, and your shareholders won’t have any reason to pressure you to do something else. Don’t overcompensate your executives or put up with their poor performance. Don’t let obvious strategic alternatives pass you by. Be engaged and be prepared.

Another way to fight back is to be constantly aware of the real value of your company. Begin with a solid strategic plan. Create financial forecasts that reflect the results of the successful execution of that plan, and use a discounted cash-flow method to determine the net present value of the company’s future cash flows and stock price. With that information, you’ll be much better prepared to defend your strategic plan and vision for the future of the company against activist fund managers who may try to get the shareholders to move in a different direction. Too many companies are unprepared to respond to activist investors with confidence because they don’t know their companies’ worth. As a result, they become emotional and reactive instead of fact-based and proactive.

If you do find yourself the target of an activist fund manager despite all your precautions, don’t get into a public relations battle. Watch carefully what you say and control who speaks to the media. Try to develop an open line of communication with the activist manager and to build a relationship on honesty and trust. Don’t be a shrinking violet! You must be able to articulate why your board of directors and management is doing a good job of representing the interests of all shareholders, and why your strategy and its execution will result in respectable returns for all investors. If the activist investor continues to fight after that, engage your response team to effectively push back.

Having active investors is good for business, when they are loving critics. But extreme activist investors whose only interest are their own short-term profits, which they create by being critical lovers, are not good for the long-term health of businesses. Loving critic or critical lover—there is a difference.