Monday, August 24, 2009

More on Activist Investor Situations

As I wrote last week, the highlight of the NIRI Southwest Regional Conference this year was a case study on how activist investors swoop in on a company that is experiencing operational and governance problems. That is not to say that the case study was the only thing we learned from. Damien Park, who runs a firm devoted to helping companies who find themselves in these types of situations called Hedge Fund Solutions, opened the conference with some interesting facts about activist investors. Here are some of his observations, mingled with my views on the situation.

Activist investors will have studied your company for an extended period of time – often a year or longer. This means that they are not acting on impulse but rather have thought through exactly what they want to do. The company, in the meantime, is often caught unawares, much like a deer in the headlights of an onrushing truck.

To this I would add that companies compound the time crunch by the committee structure to how they react in these situations. The CEO, COO and CFO get together and discuss the problem. Then they bring in their advisors – the general counsel, the investor relations officer, the corporate communications people and others and have another meeting. Then the Board of Directors schedules a meeting. All of this takes up that precious commodity, time.

As Damien pointed out, while the company is doing this, the activist has issued a press release and probably started giving interviews to the press. He probably is also saying that the company has not responded to his overtures. He may have already started to talk with other investors about how he thinks things can be improved at the target company. “Me too” hedge funds have started to buy up the company’s stock in anticipation of making a quick buck. Everything is designed to ratchet up the pressure on the company and the Board of Directors to force them to accede to the activist’s demands quickly.

The company, after an internal meeting or two (or three, or four) will come to the realization that they do not have the expertise in-house to deal on even terms with the activist and will start casting around for experts they can hire. This is one of the critical junctures of the process. Choose wisely and you may emerge unscathed; choose poorly and you may have a couple of directors on your board from the activist firm. Companies, especially the smaller capitalization companies that tend to be the focus of many of these types of attacks, generally don’t know the right people to call.

From what I can see, there are a limited number of firms that specialize in these types of situations and if you are a company under the gun, you want one of them. You don’t want your local outside counsel. You don’t want your normal public relations firm. This is like brain surgery – you want firms that have done this many times before and know exactly what the options are and are capable of acting quickly. Yes, they will probably be from New York and cost a lot of money, but now is not the time to be cheap.

One way to help prepare your company is to start to get to know the right firms before things go downhill. At a minimum you should have in your rolodex/contact list the following types of firms that work on activist shareholder defense situations: a law firm that specializes in this area, a proxy solicitation firm, a firm that is expert in the defense against activist investors, a public relations firm that has experience in proxy contests and shareholder activism and investment bankers that have M & A experience. There are a limited number of firms that have extensive experience in this area, so talking to all of them, selecting the ones that fit your company and you are comfortable with and maintaining a dialog is not that time intensive. And more crucially, when the time come that you need this type of advice, you will know the right people to call and save precious time.

Think of it as the Boy Scout defense: “Be prepared”.

Monday, August 17, 2009

IR and Activist Investors

Last week I had the pleasure of attending the National Investor Relations Institute (NIRI) Southwest Regional Conference in San Antonio. I’m on record as having said this before, but I think it bears repeating: I believe that the Southwest Regional Conference is a better learning experience for investor relations professionals than the National Conference. I say this because the Southwest Regional Conference is shorter – a day and one-half as opposed to two and one-half days and thus more focused and, with a smaller number of people in attendance, you actually feel as if you have a chance to get around and talk to everybody.

This year, under the leadership of Lee Ahlstrom, President of the Houston NIRI chapter, the Conference took an interesting departure from the usual lineup of speakers. The first morning saw everyone engaged in a case study examining the actions of an activist investor confronting a company with operational and governance issues. The case required everyone to participate, assuming the role of members of the Board of Directors, while members of management, the activist investor, and an institutional investor presented their side of the situation. The case drove home the incredibly fast pace of events in these types of situations, as members of the Board found themselves with large amounts of data, conflicting agendas and not much time to make a decision.

As someone who uses case studies to teach investor relations, I was very interested to see how things would turn out. After all, the audience was mostly corporate IR practitioners, who would normally be expected to side with management. I had worked on the case with Lee and a number of other professionals in the field and thought that the case was even-handed, presenting issues on both sides of the situation, but with case studies you never know quite how the participants will react. To my surprise, the overwhelming number of participants voted in favor of negotiating with the activist shareholder, recognizing the difficult realities of activist investor situations.

I would be the first to admit that a single case study result does not a trend make. But Directors face enormous pressure to do something in these situations beyond the Nancy Reagan defense (“Just say no”). Add to that the additional pressure Board members face when you consider Director’s liability and potential lawsuits, and you start to understand the leverage activist investors have.

As investor relations professionals we are often the early warning system for these troubles. If you are consistently getting questions about underperforming units or assets, you should let your management know. Hedge funds often talk to one another about investment ideas and when the same question keeps popping up it can serve as a warning sign. Similarly, if your corporate governance scores are low or your compensation practices out of line with your peers, you should be tactfully suggesting that the Board address these issues. Better that the Board act on its own than be forced to by an activist investor.

Finally, set up a program to talk to your major institutional investors to discuss items other than the latest quarterly results. Solicit input on governance issues, compensation and equity plans, with senior management present. You can do this either as a separate call or ask that you spend 5 – 10 minutes on the topics during your next non-deal roadshow. Those are the institutional votes you will need next time there is a potential proxy fight and you would be well served to have a history of listening to your investors on these issues rather than waiting until you are under the gun.

Tuesday, August 11, 2009

Corporate Communications and Ethics

What do you do when you no longer believe in the position or information your employer wants you to tell the public? If you hang around the business of disseminating information for companies long enough, this is an issue you may very well face.

Such was the position Wendell Potter, former Vice President of Corporate Communications at CIGNA, the health care insurer, found himself in a while back. His experience in seeing the human side of lack of health care coverage ran smack into his company’s opposition to health care reform and its practices of canceling health care coverage in order to write only the most profitable policies. Potter underwent a change of heart and wound up leaving his executive position at CIGNA in order to work for the opposite side of the argument. You can discover more about his actions and see his interview with Bill Moyers at

The interview set me to thinking about the right way to handle such situations, either in an investor relations context or a broader communications context. What are the ethics of the situation? Does your duty lie to your employer or your sense of what’s right? When do you reach the point of walking away? What about your family that relies on you for support? You can’t predict how or in what circumstances these situations will confront you. Not all of us have a moment such as St. Paul on the road to Damascus, but if you have thought through some of the things you may face beforehand it helps clarify the issues when it becomes your turn in the penalty box.

First, there are the simple cases. At the egregious end of the scale, if your employer tells you to communicate something that is wrong or clearly misleading, and it’s material, you are obligated to say no. For public companies, disseminating false or misleading material information is a violation of federal securities laws and no employer can make you break the law. If your choice is between going to jail or being unemployed, better to be free and poor than employed but awaiting sentencing.

At the other end of the scale, there are the things your company does which you may not personally like but which you have to defend. Corporations are profit-maximizing entities that sometimes close divisions or plants at great human cost. You may not like the particular actions in question, but they are for the long-term health of the corporation and its shareholders, so you swallow hard and stick to the company talking points. Welcome to the real world. As long as you can get up in the morning and look yourself in the mirror, you should be OK.

But what if things fall somewhere in the middle or you can no longer look yourself in the mirror? You become convinced your company is wrong, or headed down the wrong strategic path? They are not doing anything illegal, but they are doing things you don’t agree with. At what point do you get off the bandwagon? Are there things you can do to prevent what looks to be inevitable or are the only options quit or keep your mouth shut? I wish I had the answers for those questions, but they are often very dependant on the exact situation a person finds themselves in, and each of us must find our own ethics path, often without much help from anyone else. There are however, a couple of books that might be helpful to the process. Joseph L. Badaracco, Jr. a Professor of Business Ethics at Harvard Business School, has written two books, Defining Moments, When Managers Must Choose Between Right and Right and Leading Quietly, An Unorthodox Guide to Doing the Right Thing. These books suggest strategies for de-escalating situations where ethical conflict may arise. In addition, Professor Badaracco recognizes in Leading Quietly that sometimes the small things we do in the name of self-preservation are OK. All of us have mixed motives in the business world, including the desire to stay employed. Sometimes it may be necessary to pick your battles, saving your moral stands for the important issues.

I haven’t presumed to provide many answers here. When faced with these situations, each of us must do what we believe to be right. The press celebrates those like Wendell Potter who take a clear moral stand. Certainly there is justification for this, as they have clearly sacrificed much to make their stand. But as Professor Badaracco points out in his books, there are often things we can do to dial down the potential conflict before it comes to an all or nothing stand. These may not be perfect solutions, but it’s not a perfect world.