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.