How to appease activist investors, without losing your shirt

Rule one for corporate boards: avoid complacency

April 13, 2012

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They might be gunning for you. Squinty eyes scanning the oil patch − looking for the weak or undervalued while loading their shareholder revolvers, gunning for a proxy fight. Conditions in Alberta’s oil and gas sector are ripe for action by activist investors. Especially from fund slingers south of the border.

Illustration Anthony Tremmaglia

Already taken down this year were Research In Motion’s (RIM) founders, felled, at least in part, by Jaguar Financial, a Canadian merchant bank targeting underperforming companies. Rounding up RIM stockholders, Jaguar successfully impelled a C-suite coup at the BlackBerry maker.

Over at Canadian Pacific Railway Ltd. (CP), there’s an ugly war of words going on between its board and American hedge-fund activist Bill Ackman. Ackman, with a 14.2 per cent stake in CP, wants to derail CEO Fred Green and replace him with former CN chief executive Hunter Harrison. Griping that CP underperforms compared to its rivals, Ackman is inciting shareholders to join him in a proxy vote this May to rebuild the company his way.

M&A expert Sander Grieve, co-chair of Fraser Milner Casgrain’s mining group in Toronto, sees it all as part of a growing trend in Canada, one fed by U.S. experience: “Activist investors are feeling their oats a bit more in terms of questioning and taking on boards.”

Why is investor activism moving north? The number one reason, suggests Grieve, is because the 2008 market collapse left the world with constrained capital. “It’s difficult for some, especially smaller enterprises, to raise money. The old flow of private placement deals (to mutual funds, large banks, pension funds) has slowed down significantly.”

It also helps that Canadian securities laws make it easier for activists to elicit support from fellow shareholders and initiate proxy battles against management.

So, how to stave off such face-offs?

It can be a tricky business, says Alex McPherson, Edmonton chapter chair of the Institute of Corporate Directors (ICD). Some companies, including CP, have been accused of giving activist investors preferential treatment over other shareholders in hopes of placating them and keeping their complaints out of public view. And, legally, when trying to show activists they may be off target with complaints about poor corporate performance, boards must be ultra-careful not to divulge non-public information.

Boards also need to carefully assess the nature of activist complaints and intentions. Are they vultures looking to extract short-term value from the company or are they genuinely concerned about its long-term prospects? Then management must decide whether they should be handled by investor relations, public relations, management or the board.

But they can’t be ignored. Activist investors are like fire alarms − annoying, yet they can also rouse boardrooms, warning them they’d better figure out what’s smoldering amongst shareholders. When dealing with activist investors, it’s critical, McPherson says, to avoid personal mudslinging. He thinks boards need more training on conflict issues.

Hugh Arnold has much to teach boards on the subject. A professor at Toronto’s Rotman School of Management, Arnold teaches several courses as part of the ICD’s director education program. He says in recent years directors find themselves increasingly confronted by questions from shareholders and media. “These activist shareholders are often masterful in their ability to work through the media to bring attention to the issues of interest to them and to use the media to generate change that benefit their interests.” To rebut them, today’s boards must be “media savvy.”

He adds one last tip for boards that want to avoid duels with activist investors − avoid complacency. “They need to ensure they’re asking themselves tough questions with regard to how they are doing before it requires an activist shareholder to come in and force that question on the table.”

Anthony A. Davis is a Calgary-based freelance writer who has a written on a range of subjects around the world.

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