This article was originally written By Erin Essenmacher

“Cui Bono?”: Who Benefits from Shareholder Activism?

The phrase “shareholder activism” can strike fear in the heart of even the heartiest board director. One look at the headlines and this reaction is understandable. Activism can be destabilizing, disruptive, detrimental to the strategic plan, and in some cases, it can cause reputational damage to companies and company leadership alike.

“There’s definitely a stigma attached,” says Beatriz Infante, director of PriceSmart, Ribbon Communications and Liquidity Services, and CEO of BusinessExcelleration. “I have received direct advice from people saying, “Oh, don’t go on an activist slate. You’ll be ruined as a director.’ I think a lot of it comes from people who harken back to the corporate raiders of the 1980s and early 1990s. They were more “rape and pillage” guys — the folks who were not looking for the long-term interest of the company. They just wanted to get a very fast return and move on.” 

But just as the nature of board service itself has changed over the last 30 years, becoming more complex and nuanced, shareholder activism has evolved significantly since its ”corporate raider” era. “A [personal computer] existed in 1987, but it’s very different from a PC today, yet we still call it a PC,” says Infante. Just as the sophistication of the PC has involved so, says Infante, has shareholder activism. “A whole industry started growing around these activist investors, some of whom had a very thoughtful approach to activism.”

The shift in how many activist investors approach their work means a plethora of examples where shareholder activism can have a net positive effect on companies and the board itself. Activism can have many benefits, says Hoshi Printer, who serves as Board Chair at Lantronix. 

“It plays a key role in keeping the company and the board on its toes. They do a lot of research and can be a force for good,” says Printer.  He points to an example of a board he served on that was approached by an activist who was questioning the company’s strategy. “They made some very constructive comments that our messaging was not clear. And when you look back, they were right. You might say, ‘Well that seems like a relatively trivial item.’ It’s not trivial because how you communicate your strategy to the investors in a simplified fashion, saying what the company is doing and intends to do, is important. It ultimately meant simplification of product lines and strategy. It was pretty profound.”

In many cases, the board may already realize there is an issue but it feels stuck between a rock and a hard place. New perspectives in the mix can help shake up old assumptions and create space for needed change. 

“Sometimes, when you add a new director or two to the board, they really can change the conversation,” says Infante. She joined a board as part of an activist outreach. The board knew they had an underperforming CEO but felt hamstrung because they did not have a strong leadership bench to draw from. “It was a case where you’ve got a board that essentially understands what the issues are, but they don’t quite know what to do about it. Bringing in a new director helped convince them that, even though the alternatives are scary, the current situation is even scarier. And they all understood that they needed to do a CEO change and they were the ones who led the charge on replacing the CEO.”

Intentions and Time Horizon Matter

Whether or not activist activity is a net positive for the company depends heavily on intentions and approach. Those who start the conversation with investor relations or management through a more constructive lens can bring about meaningful change in a way that buoys all stakeholders, says Maryann Bruce, director of Amalgamated Bank.  “I differentiate between some of the activist activity we see in the headlines and what I call a ‘friendtivist,’ which is an organization or a person who sees that a company is struggling based on their own metrics — could be stock market underperformance or similar — and really wants to come in and help. They want to talk to management and the board about ideas to get the company back on track. Maybe they are investors already or they say ‘“We’re watching you, we feel there’s a lot of upside here, and we want to work with you, the management team, and the board to make that happen.’”

The focus on the time horizon is key. While more constructive activists may have a slightly different view of what long-term value creation means in a given company, their focus is still rooted in value creation for the company, not just financial self-interest. 

“Let’s be frank: Today, there are still a bunch of companies that are very aggressive activists who really don’t care too much about the long-term interest of the company as much as making a quick buck,” says Infante. “They may be trying to drive up the stock price or create some action. Maybe they’re unhappy with some things, but they don’t necessarily have a plan. Or they want to take a strong position on the board and sell the company super-quick. They have not thought much beyond how the company can be sold and where it can be sold.”

In more public fights, destructive activism can include inadequate director nominations or forcing the company into actions that lead to unnecessary turmoil. In extreme circumstances, activists may seek to personally damage the board or CEO. In fights with a “winner takes all” mentality, everyone ends up losing, says Bruce.

“At times, things can get really ugly, with personal attacks on the CEO that have nothing to do with the business. It turns into a smear campaign, which is unproductive. When people come in with an agenda—like trying to take control, get a board seat, or oust the CEO, board chair, or the entire board—it almost never ends well.”

Activism Is Not “One Size Fits All”

Most of the proxy battles that grab headlines involve large public companies that are household names. Think Disney, Starbucks, DuPont or, most recently, Honeywell. Those fights can be high-profile, loud and messy. They also represent a tiny fraction of activist activity. The bulk of shareholder activism happens in mid, small and microcap public companies, and the types of activists drawn to smaller-cap companies are not always the same as those who engage in higher-profile fights. These smaller activists may propose solutions without considering the complexities of legacy businesses or underestimate the difficulty of balancing legacy operations with innovation.

“Smaller activists have less resources to do the work. They do not have armies of analysts to probe and evaluate. So, sometimes, while their overall message is okay, what they ask for does not hit the mark,” says Printer,  “They may ask for a breakup of something or ask ‘Why are you in this line of business?’ They come in with pre-set, standard solutions. They’ll say ‘Milk the product’ or ‘Invest in AI.’ But it may not be appropriate because many of these companies have legacy businesses and it’s very difficult to move things around. You cannot just shed a legacy business, because that’s the cash cow that allows you to move into the newer areas. And I think they sometimes miss the difficulty because they have not themselves gone through it.”

The Board’s Role

Often, shareholder activism results in activists having a seat at the table, which can be an adjustment for the board. Whether the experience is a net positive depends in part on how the board reacts. Printer has had both experiences — he has been the activist at the table and on the receiving end as a board member. When he joined a board at the behest of an activist, the transition was rough.

“It was a difficult situation. I was not well-accepted and, for the first eight months, the board members who were left were very much against me coming in from the outside and being forced on them, “ says Printer. “Their behavior was antagonistic at every meeting and on virtually every point, with a high degree of skepticism on whatever I had to say. They were very dismissive of any comments or suggestions that I made. I struggled with it, but also intellectually understood that it was going to take a while. It was a difficult process, but it gradually got better.” 

The experience taught him the need for grace and fortitude in the face of what may be initial resistance by some board colleagues.

“Work toward constructive integration, have patience and resilience, and it will come over time,” says Printer 

For existing board members, it’s important to resist the temptation to default to a defensive posture, instead taking a forward-looking and constructive approach. Be gracious, and integrate new members quickly by sharing information and involving them early. Try to check your ego and your bias at the door and be open to a different point of view by giving due consideration to rational and constructive input from activist members. If an activist is at the table, it likely means there are valid concerns that need addressing. A thoughtful, qualified colleague who brings fresh thinking and skill sets can benefit everyone. 

Or, as Infante says, “Be open to changes that are necessary, even if they’re scary,” .

“Ultimately, Bruce says, it’s the responsibility of each director to fully understand and communicate the company’s strategy, risk profile, and the factors driving its stock price.

“When your stock is out of favor, you need to understand why and be able to explain it. On earnings calls, your CEO and CFO must proactively address this.”

When an Activist Calls

If your company is approached by an activist investor, some key factors will help you to respond in a way that can be a net positive. First, encourage the CEO and leadership team to engage openly with concerned investors. Next, distinguish between activists aiming for partnership and collaboration versus short-term financial gain or company control. Evaluate the activist firm’s reputation, investment size and tenure in the stock. Consider hiring consultants to independently assess the activist’s claims and the company’s vulnerabilities. And be prepared with crisis management resources if activism turns adversarial.

The key here, as with all important relationships in life, is a mix of open communication and a willingness to listen and consider constructive feedback. This is especially important when the waters are smooth, says Infante.

“Build alliances in peacetime, because then you can have a conversation that says, ‘I know that they want X, Y and Z to happen, but we’re working on it.’ It’s about keeping the channels of communication with leading shareholders very open so that they, if need be, can become alliances.”

Erin Essenmacher is chief operating officer of Conscious Capitalism, advisory board chair and senior advisor of Athena Alliance, a board member of NXU Inc., and an advisory board member of DEMI Fund and Future Directors Institute.