Wharton@Work

November 2016 | Senior Leadership

Is Your Board Ready for an Activist Investor?

Publicly traded companies worldwide are facing growing pressure for strong and consistent performance from their institutional investors. Some of those holders are not content just to grumble, publicly or privately, about the changes they want to see. Activist investors are calling for and acquiring directorships to a greater extent than ever before. And even when they fail to secure seats on a board for themselves, they are often still successful in pressing company management to meet their demands for strategic redirection or even new leadership.

Some of the press surrounding activist investors is negative, portraying them as short-term thinkers out to cut costs, increase stock prices, and cash in. Many company executives tend to fear them, and a recent study seems to validate their personal concerns: when activist investors target a company, over 34 percent of CEOs leave within a year, more than twice the rate at other firms. But that’s not the full story, reports Wharton management professor Mike Useem.

“Activist investors are neither all good, as their advocates stress, nor all bad, as some of the critics would have you believe,” he says. “It’s better to view activism for what it is, case by case.” Useem helps senior leaders and current and aspiring directors to become more proactive, creating a partnership between management and the board that can work to deflect unwanted attention from activist investors or deal with them effectively if they become directors. As co-author of Boards that Lead, and director of the two-day Wharton Executive Education program Boards that Lead: Corporate Governance that Builds Value, he is focused on building, managing, and leading stronger corporate boards that can resist or, when appropriate, incorporate activist demands.

“Activist investors don’t pay much attention when a company is performing well,” says Useem.  That means a strong board, sound leadership, and an effective strategy can be an effective deterrent. “But when a company, or its board, is not doing well, they may end up in the crosshairs of activist investors. The activists don’t always succeed, but studies confirm that companies that are not performing as well as expected are more often targeted for change in strategy, leadership, or both. Sometimes it works for good, and sometimes not.”

How can senior leaders and directors avoid the attention? Useem prescribes a two-pronged approach. First, think like an activist investor. “It’s useful for managers and directors to view themselves and their strategy with activist eyes before an activist finds them. Ask the questions that the activists would ask if they were in your boardroom. Make the changes they would demand that make sense, and disregard the calls that are misdirected or that stem from their short-term self-interest.”

But being proactive doesn’t stop there. Useem says management needs to better understand all their owners, activists included. And when you become aware that some of them are calling for change, don’t wait for them to act. “Engage them directly and engage them now,” he advises. “Create a dialogue, listen, and then ask yourself the questions that they are asking. Reach out to activist investors before they come after you.”