Against the tide of shareholder activism

You cannot blame boardrooms today for being preoccupied, with everything from Brexit contingency planning to the prospect of a Corbyn government.

Yet there is another, more pressing need for every UK listed business to be preparing for: activist investors.

Shareholder activism, whereby an investor leverages their stake to put pressure on the management of a company, whether for financial or ethical reasons, increased sharply last year. The number of campaigns launched against companies reportedly doubled to 25, as investors accumulated £5.72bn worth of shares.

This trend is forecast to accelerate further in 2019 as activists seek to capitalise on the fall in sterling, political uncertainty, and a growing propensity for institutional shareholders to listen to activists’ arguments and mobilise quickly around a common issue.

So how should companies be preparing for this trend in activism?

First, businesses need to articulate what they are already doing. Activists, particularly those with a financial incentive, select their target not just because a company is undervalued, but because its management team is perceived as being asleep at the wheel. In many cases this is a communication rather than a management issue.

Companies should get on the front foot and seek credit for the work that is being done, articulating their long-term value creation story and communicating the proactive steps being taken to accelerate their growth strategy.

It is remarkable how many businesses magic up a profit forecast uplift or opportunity to dispose of or acquire a business when an activist appears on the register or they receive a takeover approach. Think how much trouble could be saved if they had just demonstrated a more proactive attitude originally.

Second, don’t take your existing shareholders for granted. Whether big UK institutions or small private investors, shareholders will sometimes view a new activist as a welcome catalyst for change.

Few shareholders in Whitbread will lament the pace at which Elliott’s emergence on their register precipitated the sale of Costa for £3.9bn in cash after years of perceived inaction.

Financial calendar announcements are a platform for management to communicate their agenda and engage with investors. Chief executives must seize it as an opportunity to engage with the market, listen to investor concerns, and start pre-empting and addressing potential lines of attack from an activist.

Finally, companies must not underestimate the sophistication of today’s activists, both in terms of the issues they will champion and the communications strategies they will deploy.

Last year, Jana Partners, an activist hedge fund more accustomed to pushing for M&As or operational change, led a successful campaign against Apple on a social issue: how technology affects children’s wellbeing. Part of its success was down to a carefully crafted communications campaign, with a public letter and online initiative which resonated with Apple’s other shareholders and customers.

Companies must prepare to engage with their audiences in the networked age where a tweet from an activist on an ethical issue can very quickly mobilise a tribal following, pushing a business outside its comfort zone of private shareholder dialogue.

The current climate is one ripe for activists aggravating for change, be it strategic, operational, or even social. By seizing the narrative now and clearly articulating the plan to deliver long-term shareholder value, companies can keep the activist wolf from the door.