Alan Guarino and Nels Olson are Korn Ferry vice chairmen of the firm’s Board & CEO Services practice. Robert Nardelli is founder and CEO of XLR-8 LLC and former CEO of Home Depot and Chrysler.
It’s the news that corporate board members and managers dread: An activist-investor firm, with billions of dollars in financial firepower, is buying up the company’s stock. In 2017, activist investors have pushed for major changes at General Electric, Nestlé, Procter & Gamble and a slew of other firms, big and small.
Once the challenge is laid at the target company’s feet, it has any number of tactics to deal with the intruders, ranging from outright opposition to capitulation. But there’s a better solution: Directors should get ahead of the activist onslaught, and figure out ahead of time what makes the company vulnerable. After all, the board’s job is to ensure that the company is on the right track, and activist interest often is a signal that something is amiss.
In a new paper, “Three Ways Board Members Can Think Like Activists,” we argue that it’s far better to challenge yourself as a board and win, rather than being driven to the same point by an activist. (To read the full report, click Download the Report.) Thinking like a well-intentioned activist can help improve your company’s future. Here are three actions directors can take.
1. Ask hard questions and consider alternatives.
Directors should be asking the same questions that an activist investor would. Those queries are tough, but necessary to answer. Is the company’s portfolio too complex? Is management top-notch? Is the cost structure too high? Has the firm missed an inflection point? Directors should also be on the lookout for warning signs, including underperforming assets or divisions, a low stock price, and top managers getting big rewards while the company’s revenue and earnings stagnate.
2. Connect with shareholders.
The time to get to know shareholders is before an activist appears on the radar. At some companies, individual directors have a responsibility for shareholder outreach, while other firms have a formal shareholder committee whose purpose is to forge direct links between the board and investors.
3. Ensure the board is fresh and focused.
Board involvement is critical when it comes to governance issues. Increasingly, non-binding “say on pay” questions have cropped up on corporate ballots, allowing investors to vote for or against executive compensation packages. One way to help directors do their jobs is to mandate that the chief financial officer be a member of the board—a longstanding procedure in Great Britain. Boards should also have fresh blood, periodically bringing in new leaders from diverse backgrounds who can ask tough questions of management.
Finally, boards should be compensated based on performance goals. While some would argue that most directors don’t serve primarily for the money, appropriately compensating them using company shares as a meaningful component of their incentive package is a good idea.