The Case for Activist Directors

Having had the honor of serving on 40 boards in my career, I have observed the good, the bad, and the ugly when it comes to director passion, commitment, and conduct. A few months ago, I wrote about activist investors—typically managers of hedge and private equity funds—and the impact, both positive and negative, that these "shin kickers" can have on public companies. One thing is certain: They have passion and are committed to creating shareholder value—and challenging the status quo.

Why do activist investors become active in certain companies? Usually their stated purpose is to "unlock value" that the management or board of a given company has been unwilling or incapable of achieving. Directors should be aware that hedge funds launching proxy battles to elect their own board nominees succeed about 35 percent of the time, according to research by Morgan Joseph & Company, a New York investment bank.

I am frequently asked by boards what they can do to protect themselves against activist investors. My answer is simply that they must aggressively focus on high-quality corporate governance processes and delivery of shareholder value. In other words, become activist directors.

Serve, don't sit: "Proactive board members are change agents because they are not afraid to challenge the status quo, have a strong sense of urgency when a company needs to improve its performance, and value 'doing it' over 'planning for it'."

Engaged and Emotional

The best deterrent for shareholder activists is for directors to focus on their fiduciary duties of care and loyalty, and on sound corporate governance practices and processes. Corporate governance is an art, not a science. There are no checklists or black-and-white rules. Rather, extensive effort and sound judgment is required.

That's why at many board meetings over the years, I've found myself wishing that directors would be more engaged and emotional about their jobs. Too many directors simply show up at meetings, but don't step up. They don't care, and don't even show interest. At one board meeting I recently attended, the chairman actually had his laptop open and was returning e-mails throughout most of the meeting!

I am amazed at how many boards can rationalize the consistent poor performance of the companies they serve. Their companies can lag behind the competition in every relevant financial and productivity category, yet they feel the business and its management team are doing well. I often wonder if they had a million dollars of their own money invested in the company whether they would still be happy with the results. I seriously doubt it.

Anatomy of a Proactive Board Meeting

Perhaps one of the best books written on the subject of contemporary board governance is Boards That Deliver by Ram Charan, an advisor, speaker, and author on corporate governance. In his book, he describes the evolution of boards from ceremonial to liberated to progressive (or proactive) entities.

It is in this last category that all boards should strive to be. Proactive directors take seriously their representation of the shareholders' best interests. They understand the company's markets, customers, products and services, competition, and strategies—not just last quarter's financial results. These directors insist that management provide reports, well in advance of a board meetings, that include a solid analysis of current business issues and long-term strategic objectives. Proactive boards want the focus to go beyond achieving the current year's revenue forecast and expense budget, so all board members come to meetings prepared and informed.