Drums of activism start their beat as AGM season nears

Annual Report

Purple 23 Nov 2017
2 mins

It is that time of the year again, when the leaders of the majority of public companies have the opportunity to showcase their annual efforts to their investors and provide an insight into the prospects for the future.

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As the bulk of AGMs get underway this month, corporate services Morrow Sodali offered advice to business leaders on how best to engage with shareholders, including activist shareholders, using New York-based fund manager BlackRock – the world’s largest investor with more than $US5 trillion of assets under management – as a profile case.

In the report, Morrow Sodali chairman John Wilcox said shareholders like BlackRock expect to be treated as long-term owners on behalf of their clients, rather than as traders, activists or market opportunists.

Mr Wilcox said BlackRock addressed three pillars – engagement, access to directors and disclosure – to support its team’s stewardship work.

Engagement, referred to as the nexus between corporate governance and investor stewardship, comes in the form of statutory disclosure documents, investor relations programs and other degrees of corporate communication. Its purpose is to establish and maintain a relationship before a crisis arises.

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Access to directors, considered a no-brainer, allows companies to showcase the board’s capabilities and explain board processes, while the disclosure pillar challenges companies to tell their stories in a holistic way that integrates financial performance and operating results, together with specific board-level responsibilities.

“For companies willing to meet the challenge, the three stewardship pillars provide a blueprint for how to align with shareholders,” Mr Wilcox said.

“The activists I’ve worked with are extremely analytical, they’re very sharp, very rational people.”

US publication Strategy+Business says, despite sometimes not being obvious, both shareholder activists and company management both share the same goal, in theory, which is to maximise long-term value for the business.

“To respond more effectively, and increase the chances of boosting long-term value, management should develop a more effective plan before being approached by an activist,” Strategy+Business says.

“Senior managers can do so by making use of their chief advantage: information and knowledge of the business.”

Larry Kanarek, director of management consulting firm McKinsey & Company, says executives must work with activist shareholders in order to improve performance, rather than working against them.

He argues that activists often have valid reasons for pressing companies for change, and has urged executives to react more collaboratively when confronted.
“Working with activists, rather than against them, actually can create value for all parties,” Mr Kanarek said.

“The activists I’ve worked with are extremely analytical, they’re very sharp, very rational people. And often, they have a pretty positive story to be told that should be at least paid attention to.

“They’re not always right, but their batting average isn’t bad.”

In the event of an action by a shareholder, proxy adviser or activist group, we recommend the following:

Engage constructively with the party, and react in a collaborative way;
Use the situation as an opportunity, rather than an issue, to generate more favourable results for the company; and
Communicate the plan, not only to respond to an activist, but to also attract shareholders who voice their objectives for long-term value creation.

To improve the outcome of an AGM, it is important to engage with stakeholders prior to the event to get a sense of what their concerns may be, so that those issues can be addressed, responded to and (hopefully) resolved before the meeting.

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