Proxy Contests on the Rise – Activists Emboldened by Success
According to data released last week by The Conference Board, activist shareholders are driving a significant uptick in proxy contests. During the first half of 2013, Russell 3000 companies saw more than a 45 percent spike over the same period last year. There were also numerous proxy fights launched against managements of S&P 500 companies, which are traditionally far less vulnerable to such attacks – the continuation of a trend that saw the average market capitalization of activist targets up from $3.9 billion in 2011 to $8.2 billion in 2012.
And at the same time the frequency of proxy contests is increasing, those launching them are becoming more aggressive – and more successful. Of the 35 proxy fights that were launched against Russell 3000 companies, approximately 25 percent sought not only a board seat, but “a broader range of strategic, organizational, and governance changes.” Even more troubling for boards and C-Suites, activist success rates against both Russell 3000 and S&P 500 companies reached a five-year high in 2013 – reversing a trend that had seen success rates on a steady decline since 2008.
These statistics validate the anecdotal evidence that has been building for some time – and it’s becoming clear that no corporation is safe from increasingly well-resourced and influential activists. In just the last several months, we’ve seen activist funds (with more than $100 billion under management worldwide) sway institutional investors with greater effect than ever before. We’ve seen giants such as Apple and Dell pressured by the likes of David Einhorn and Carl Ichan. Now, the numbers leave no doubt that a new era of shareholder activism is upon us – one in which activism itself is becoming an increasingly attractive investment strategy for those powerful enough to employ it.
For boards of directors, the takeaways are two-fold. First, they must prepare for an activist challenge as if it is an eventuality; not an outlier. They have to be armed with messages that communicate value and vision to shareholders, analysts, and increasingly oppositional advisory firms such as Glass Lewis and ISS. And they must also be ready to communicate long-term value strategies that assist in defining the new breed of aggressive activist challengers as raiders seeking nothing more than the quick payday.
Second, and perhaps even more important, boards need to understand that the most effective shareholder communications are those that assist in preventing a proxy contest in the first place. They need to redefine communications strategies that are all too often focused solely on the annual meeting or major events and use peacetime to directly build stronger shareholder relationships on an ongoing basis.
In addition, they must leverage everyday developments to aggressively communicate those same value and vision messages that are so crucial when a contest arises. They need to make the most of new opportunities – such as the SEC’s recent approval of social media as channels for the distribution of material information – to provide a steady stream of supportive information and keep their messages front and center at all times. And they need to establish avenues for direct-to-shareholder communications now – before a proxy contest arises – to ensure that they have a credible relationship with this captive audience when it is needed most (another strategy in which social media engagement proves particularly valuable).
In an era of aggressive activism, the boards best positioned to fend off an activist attack are those that condition the marketplace before one materializes. When directors use peacetime to establish and communicate their own overarching narrative on an ongoing basis (rather than just once a year), they find that even the biggest fish have a harder time swimming upstream against the already dominant perception.
John Lovallo is a Senior Vice President at LEVICK and Chair of the firm’s Corporate and Reputation and Financial Communications Practices. He is also a contributing author to LEVICK Daily.