February 03, 2017
The Constructionist Investor
Will there be a different activist playbook in 2017?
Is activist investing at an inflection point? Are the days of Bill Ackman, Dan Loeb, Jeff Smith, and Carl Icahn – those powerful investor activists who target and terrorize management teams and boards – effectively over? Are the days of vocal, well-organized activists publicly criticizing management teams on performance and strategy – while demanding changes in corporate governance, new management, board representation, operational improvement, restructuring, and share buybacks – in the past?
Well, the answer is no. Activists are not going away anytime soon, but we might see a different approach in 2017.
Activist investors are known for launching aggressive communications campaigns to influence key stakeholders and pressure corporate leaders to accept their recommendations. According to Activist Insight, there were almost 640 public demands made on companies by activists in 2015. Activity did not slow in 2016; from January to October there were about 625 public demands. And these are only the campaigns that were not settled privately and avoided a public disclosure or open hostilities.
Investor activists are very sophisticated and skilled at generating awareness of their crusades and making compelling arguments for change. Their goal is transparent – higher shareholder valuation and a ROI. By using the national media, digital platforms, open letters, white papers, websites, and investor conferences to their full advantage, they are in a strong position to persuade stakeholders to agree with and follow their position.
Many of the executives they challenge often lack communications skills, are unprepared for aggressive attacks, and stay silent or speak out too late to tell their story. Their silence offers the activist an opportunity to control the narrative. For years communications professionals have urged executives to prepare and understand the importance of using strategic communications tools at the earliest juncture. Progress has been made – as many boards now push for their own activist playbook and rehearse scenarios to meet potential activist threats.
Yet just when we thought we knew the activist playbook, a new breed is emerging – the constructionist. This investor prefers to quietly engage C-suites and boards to help unlock company value. Nelson Peltz is possibly the best example of this emergent breed. Peltz prefers to describe himself as a “highly engaged” shareholder. In a 2013 Forbes story, he describes his investment style not as activism but as constructivism. Peltz takes a hands-on approach, but he now tends to work behind the scenes, avoiding the contention and public exposure that are the hallmarks of activist campaigns. His 2015 significant investment in GE as “validation capital” will be one to follow.
This trend sounds like relief for management, but here is the risk: Many of today’s leading activists start out engaging a company with a constructionist approach. They quietly accumulate a position, file a Schedule 13D, reach out to the company, arrange a meeting, and present their plan. The meeting most likely ends with the activist team pushing a bit by saying “We know that you will agree that our strategy will be in the best interest of the company and its shareholders.” However, if rebuffed, and they see opportunity, they will quickly revert to the traditional activist playbook and aggressively publicize their narrative to build a coalition with large traditional investors to drive their thesis forward.
The best practice is to approach the constructionists as warily as you would their more disruptive counterparts. Leadership needs to consistently communicate with shareholders during peacetime as well as wartime. Investors who only hear from a company in a crisis are more likely to perceive leadership as incompetent or evasive. The C-suite and the board need to convey to investors that a strategic long-term plan is in place. They must also specifically note how success will be measured and their plan will maximize long-term shareholder value.
Importantly, approach any activist engagement seriously and respectfully. Each is an opportunity to review and analyze a well-thought -out proposal presented from an outsider’s perspective. Take the time to assess the activist’s profile, time frame to meet demands, and record of performance before you decide to reject the approach outright or cave to demands. If there is a mutual benefit, negotiate. The “art of a deal” is still alive and well. That is how PepsiCo CEO Indra Nooyi worked with Peltz when he lobbied to undo the merger with Frito-Lay in 2015. PepsiCo kept Frito-Lay but instituted the improvements that presumably satisfied Peltz and created a win for the company, a win for Peltz, and a win for shareholders.
Such responsiveness and transparency reassures stakeholders. The best defense against an activist is having investors as well as all stakeholders with confidence in the company’s strategy and leadership, no matter what playbook activists use in 2017. The best way to achieve this outcome is to communicate your story through all available platforms.
LEVICK Senior Account Executive Keegan Bales contributed to this post.