Defending Against Activist Investors
Going public with an organization comes with a multitude of advantages. Predominantly, it means an increase in available capital, further visibility, and access to a wealth of lucrative business partners, etc.
Alternatively, going public means opening a company up to an array of risks. Of course, there’s a matter of the high price, a big jump in liability, and – most relevantly – a loss of management control.
Part of going public means even majority shareholders can no longer reach unanimous decisions. Regardless of their standing, minority shareholders will always have their say.
Though minority shareholders shouldn’t cause much grief. However, some investors get involved in a business with their own agenda in mind—and they’re looking to wrestle away control from the board.
For example, when businesses aren’t careful, they can end up in a stand-off with activist investors. These individuals will go out of their way to “change things,” otherwise known as making life difficult for a company’s executives.
What is An Activist Investor?
It’s not exactly uncommon for organizations to run into spots of trouble. And it might garner the attention of individuals or groups who smell an opportunity to affect change. They tend to smell weakness.
These are activist investors, and their goal is to purchase enough shares and obtain enough power to take seats on the board.
Generally, activist investors only rear their ugly heads when a company’s overall operations have been mishandled—usually leading to a loss in profits. Activists are looking to be the new sheriff in town who makes wholesale changes that they think will make the company more valuable.
Sure, that doesn’t sound so bad, but boards of directors never want to land up in that spot in the first place. Furthermore, activists have a propensity for going after people’s jobs and will attack their credibility.
Being Proactive About Activist Investors
It’s essential to create a team that’s equipped to handle activist investors. Here’s how to do it:
- The team should consist of some form of legal counsel, an investment banker, a proxy soliciting firm, a PR firm, and a streamlined group of principal officers
- Ensure the team is participating in regular meetings
- Perform training scenarios that emulate activist investors muscling into a boardroom
- The team must familiarize themselves with the various activist hedge funds and other such investors that have utilized these tactics with other companies
- There’s a need for the team to provide regular mandated updates to the board of directors
Instilling Board Unity
When activist investors or hedge funs strike, they launch an all-out assault by questioning the boards’ strategies and management performance. It’s an attempt to fracture board members into factions and often leads to the formation of special committees.
So, with primary strategic issues, the board must maintain a unified consensus when faced with an activist attack.
Also, keep in mind that methods involving psychology and perception can be more integral than any legal and financial factors in preventing individual board members from being targeted.
Hopefully, these savvy tips will leave your board of directors ready and able to neutralize any activist investors.