Fidelio, the Board Development and Search consultancy, ensures that Boards have the right people and skills at the top table; and also that those Directors have access to the perspectives and insight that they need to support good judgement.
For clients, in the UK and internationally, activism has been at the top or near the top of the Board agenda. Fidelio has responded with bespoke Board modules providing insight and a safe environment in which to understand the implications of activism for the Board, the company and its shareholders.
Building on this work, Fidelio was delighted to host a Board breakfast for Chairmen, Executive and Non-Executive Directors from a range of UK and international companies. It was moderated by Gillian Karran-Cumberlege, founder of Fidelio, who brought valuable front line experience of activism from her role of global head of Investor Relations of Volkswagen a decade ago. Fidelio was joined by Cas Sydorowitz, Chief Executive Officer, Georgeson Inc and David Trenchard, Former Vice Chairman, Knight Vinke Asset Management. The liveliness of the debate was testament to the importance of this topic for Boards of quoted companies.
What do Boards need to understand about activism; and, in particular, how companies get on the radar screen of activists?
Activism is on the rise. It’s estimated that almost US$ 130 billion is seeking activist investment opportunities. But it’s misleading to look at activism in isolation – activists are shareholders. They may have a very concentrated portfolio – maybe 6-11 stocks – in which they are placing all their energy and resources but, like all other shareholders, they are interested in value creation. Typically an activist investor will have analysed the company at considerable length and in depth deploying not only in house analysis but external advisors, PR firms and lawyers. They will have screened all stakeholders.
It is a mistake for a Board refuse to engage with an activist. Bear in mind that while the activist holding maybe small, activists frequently have broader support from long-term shareholders, including pension funds. This can turn into a meaningful vote at an AGM or EGM.
The reputation of activism has been shaped in the US where more limited shareholder access to management and Boards has given rise to confrontational activism. In the UK, Boards typically have closer relationships with shareholders; while in Europe public tolerance of activism is low. In the meantime activists have learned that the aggressive US approach can be counterproductive in Europe. Hence we are typically seeing a quieter, more consensual approach in Europe.
For example, US activists, even with a small shareholding, favour securing their own (or independent) appointments to the Board. Until recently this has been rare in Europe.
But Boards should not be lulled by perceived cultural differences in activism; in reality we are seeing a spectrum and smart activists are able to select what is likely to be the most effective approach.
Activists are typically structured as hedge funds in terms of style and fees but the analytical approach is closer to PE firms. They have been described as private equity operating in the public markets. Activists are making concentrated committed bets by searching out hidden value and constraints to value that they can expose and remove. Accordingly, the first line of defence must be for the Board to ensure that the share price truly reflects the value of the company.
There is a healthy debate as to whether activism is a good thing with research both showing it drives value and performance, but leading business schools, including Harvard Business School, also arguing that the net effect is detrimental. Our guests agreed here too there is a spectrum from activists seeking long-term value enhancement through, for example, to those much more opportunistically piggy-backing on M&A transactions.
How should Boards respond to an activist investor?
Given the likely upfront investment in analysis and time that an activist will have made prior to disclosing their stake, there was a view that a refusal to engage or knee jerk rebuttal by the Board would be both foolhardy and short-sighted.
Understanding the motivation for engagement is important as this could also influence the likely response from other shareholders. The more the activist can claim to be aligned to long-term investor interests, the greater the need for the Board to articulate its existing strategy for value enhancement.
Activists frequently work closely with PR firms and the media, which can make it all the more difficult for the Board to covey its counter-argument. At one end of the spectrum this could verge on aggressive positioning of a story in the market bordering on front running; at the other end the activist will have thoroughly researched and built relationships with key stakeholders, thereby isolating the Board.
Boards therefore do well to be prepared by properly understanding the company’s vulnerability to activist investment and by developing and rehearsing an appropriate response. This extends to identifying key advisors.
What are the implications of activism for Board composition?
Activists will expose dysfunctional Boards, fragmented Executive teams and any disconnects between the Executive and the Board. A Board that does not observe good governance can be considered low hanging fruit and a soft target for activists. Therefore Board effectiveness is an important defence against activism and in this context the Chairman does well to ensure that the logic for each Board appointment is clear and aligned to the corporate strategy. Of course good attendance and commitment to the interests of the company should also be evident for each Board member.
The calibre of the Chairman is key. In any activist dialogue the Chairman must understand where the Board thinking really is and guard against a fragmented Board response. Our guests also underlined the duty of the Independent Director to look outside the corporate bubble, to be alert to any burgeoning shareholder concerns and importantly to stand firm against Executive teams that bulldoze with data.
Effective Chairmen also recognise the importance of key executive roles in the defence against activism. Obviously the CEO is vital but the Chairman of a quoted company should also be insisting on a CFO with a deep understanding of engaging with investors and capital markets. The Chairman will frequently have a dotted line in place to the IR Director. This role is an enormously important part of the defence architecture, frequently acting as an early warning signal for signs of shareholder discontent.
And finally, the importance of good communication, both internal and external, in seeing off an unwarranted activist attack was a clear message from the Fidelio breakfast. The Board should also care deeply about the strength and effectiveness of the Communications Director and Communications team.
Thus there is a considerable amount the Chairman and Board could and should be doing which will form an effective defence against activism. And little of that is surprising – a focus on good governance; Board composition that is aligned to the corporate strategy; a well-articulated equity story with effective internal and external communication; and an experienced CFO and IR capability which is well-versed in capital markets. Now there’s a check list!
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Should you be interested in discussing further any aspect of this Board Breakfast on Activism with Fidelio, whether related to Search or Development, please contact Gillian Karran-Cumberlege or Shu Zhang.
Moderator – Gillian Karran-Cumberlege
Gillian Karran-Cumberlege is the founder of Fidelio Partners and leads Fidelio Partners Board Practice. Through Search and Development, Gillian supports Chairmen and CEOs in building effective Boards and Executive leadership teams which drive value for stakeholders and shareholders. In this context Gillian is actively engaged, including with the 30% Club, in promoting greater Board effectiveness through increased diversity. Fidelio is a signatory to the Voluntary Code of Conduct for Executive Search firms. Gillian is also a member of the German- British Chamber of Industry and Commerce and a fluent German speaker.In addition to her executive role with Fidelio, Gillian is also an Independent Board Member of Jaguar Land Rover India; a Member of the Harvard Business School Alumni Board and a Board Member of the German British Forum.Prior to founding Fidelio Gillian held senior executive roles within some of Europe’s leading corporates; this included the role of Global Head of Investor Relations / Capital Market Communications for Volkswagen AG (2000 – 2007) sitting on the Group Governance and Marketing Committees – the most senior female executive globally. Previously Gillian had enjoyed a highly successful career in banking for example heading Group Investor Relations for UBS (1998- 2000). She started her career in Banking Supervision with the Bank of England.Gillian has an MA in History from Trinity Hall, Cambridge, and attended the Harvard General Management Programme.
Speaker – Cas Sydorowitz
Cas is Chief Executive Officer, Georgeson Inc. and has been with Georgeson for almost 15 years, bringing with him five years’ experience in international investor relations and shareholder identification. Cas is responsible for Georgeson’s Northern European Proxy and Corporate Advisory business. He has an expert knowledge of global proxy voting mechanics and key governance matters affecting issuers and shareholders globally. Having worked for several activists and against many more he has in-depth experience to support investors or issuers in complex, sensitive activist campaigns. Cas remains an ongoing advisor to the UK Department of Business, Innovations and Skills (Formerly the DTI) as well as the UK Takeover Panel and the London Stock Exchange on various corporate actions, and proxy related matters. Cas, while a New Yorker, has been in London for 12 years. He maintains membership in the ICGN, a global governance-related organisation that set the agenda for the global governance debate between issuers and shareholders. He has participated in various industry organisations including the Shareholder Voting Working Group in the UK and European Industry working committees on Target 2 Securities, Legal Certainty and the Working Group for Market Standards for General Meetings.
Speaker – David Trenchard
David was formerly Vice Chairman of Knight Vinke, one of Europe’s best known activist investment firms, and has led the engagement with some of Europe’s largest companies. He brings his expertise in shareholder engagement and activist investment to a variety of advisory and non-executive roles. He is currently Chairman of the Advisory Board of Highgate Capital Management and holds a number of other non-executive and advisory roles including at the Council of the Institute of Directors, Network Rail, and Greenbrook Communications. He is also an adviser to a number of investment companies and advisory firms on corporate governance and shareholder activism. Prior to joining Knight Vinke in 2009, David was a Senior Consultant at Tulchan Communications (one of London’s leading capital markets communications advisory firms). He had previously spent 25 years in investment banking – mostly at Morgan Stanley. He held various senior posts in equity sales and investment banking in Europe, North America and Asia. Latterly, at Morgan Stanley, he was a Managing Director in Equity Capital Markets and Head of Corporate Broking. David graduated from Cambridge University, with a degree in Economics.
About Fidelio Partners
We are an integrated Search and Development consultancy supporting Board directors and Executives through strengthening the structure and skills of the top team.
Business leaders choose to partner with Fidelio because of our deep understanding of Finance, Strategy, Communications and Governance and our ability to source world-class talent across these functions.
Through Evaluation, Development and Search our clients can ensure that the Board and leadership team are well placed to:
- secure on-going access to capital,
- sustain corporate reputation and maintain the license to operate,
- and thereby increase the value of the business.
Fidelio Partners is a signatory to the Voluntary Code of Conduct for Executive Search Firms.