Activist-investor campaigns have been on the rise for years, and this may be the trend’s biggest week yet. On Monday, General Electric shareholders awarded a seat on the company’s board to Trian Partners, the investment firm owned by Nelson Peltz. And on Tuesday, Trian narrowly lost a bid to win a seat on Procter & Gamble’s board.
The trend has proved unsettling for one board after another. But experts say not enough are building up their own defense, which starts with emulating them. “It’s far better to challenge yourself as a board and win, rather than being driven to the same point by an activist,” says Robert Nardelli, former CEO of Home Depot and founder and CEO of XLR-8 LLC.
Nardelli and others say that directors should be asking the same questions that an activist investor would. Is the organization’s weakness related to a lagging stock price, tepid net income growth, dropping market share, or something else? Then, once the board determines the answers, it can consider alternatives to rectify the problems.“Directors should be asking the same questions that an activist investor would,” says Alan Guarino, vice chairman of Korn Ferry’s Board and CEO Services practice in an upcoming Korn Ferry paper.
Experts say the board also has to establish a good relationship with investors. After all, the board is chartered to look after the shareholders’ interests. Boards can often designate an individual director to be responsible for outreach, while other organizations create a formal shareholder committee. Either way, listening to shareholders is an ongoing responsibility, not just when an activist appears.
But one of the more interesting measures may be for boards to be more introspective. Board directors should regularly ask whether their board itself is diverse enough, independent enough, and composed of people with the right skillset to steer the organization forward. This behavior on a board is easier said than done, experts say. But doing so could thwart an activist attack before one starts.
Of course, board directors have a lot on their minds. Jane Stevenson, vice chairman of Korn Ferry’s Board and CEO Services practice, says the three most critical issues facing directors today are risk management, talent alignment, and information overload. But activism isn’t likely going away soon, and its success rate is rising. According to research firm Activist Insight, 58 percent of activist-investor demands were at least partially met in 2016, up from 53 percent the two previous years. At the same time, nearly half of boards surveyed by the National Association of Corporate Directors don’t have a plan in place to respond to an activist-investor challenge.