'Tis the Season To Listen – And Do Nothing Else
The beginning of a new year should signal to the Investor Relations departments of public companies one issue that needs to be addressed more so than any other. And no, it is not what themes to include in the annual shareholder letter. What they should be thinking about is the unofficial start of proxy season and what steps management will take to address it. While management teams have been trying to close out the books for the fourth quarter, activist shareholders have been reviewing countless public companies and their SEC filings for areas of weakness, i.e. poor corporate governance practices, a complicated operating structure, an undervalued story, etc. Thankfully, many companies have spent the past several years addressing the most pressing corporate governance issues, such as executive compensation, shareholder rights plans, staggered boards and other anti-shareholder friendly measures. In addition, the expected sting of Proxy Access Rules has been both limited and delayed. Despite all this, public companies need to continue reviewing and internally discussing their corporate governance practices with vigor, just as much, if not more, than activist shareholders have been doing over the past several months. This effort is not, and should not, only be done to ensure base-level and ongoing corporate governance compliance, but more so to stay ahead of the curve and to be considered a leader. A simple way to achieve this status, in part, is to listen. Nothing more, nothing less. Just listen.
By the time a proxy contest ensues, a lengthy dance has transpired during which a shareholder has either reached out to management and been rebuffed -- usually multiple attempts which are document have been made to establish contact -- or contact was established and the shareholder was dismissed. Virtually no shareholder instigates a proxy fight without first trying to convince management to understand its view on a situation and to work in tandem to identify solutions that satisfy both management and the activist shareholder. Proxy contests simply cost too much for activists to wage these days, especially given their lower AUM, and growing concern from their shareholders that they will not be successful and therefore hurt returns. Furthermore, unless an activist shareholder is looking to unseat an entire board - this is a very infrequent strategy -- they will have to work with the remaining management team/board of directors once a fight has concluded, assuming it is successful from the activist shareholder's perspective. However, this can all be rendered moot if management teams simply listened to the concerns of their shareholders first. Let the activists set the agenda for one-on-meetings, but be sure to make your points as well, and leave the PowerPoint presentation at home. Companies should just remember to engage activist shareholders from a position of engagement and idea sharing, and not one of telling them how it is going to be. The "my way or the highway" approach is the fastest way to start a proxy contest.
Call them what you will, but listening tours can be a very effective use of management's time in comparison to the resources required to fend off a proxy contest. This can be accomplished with a visit to a company's 10-20 top shareholders, including those who are considered long-term friendly shareholders and those who are considered to have activist tendencies. (Management should not dismiss meeting with shareholders who they recently met with on a traditional non-deal roadshow, as the tenure, format and purpose of the meeting is different than when receiving an update on a company's financial and operational performance from management.) This can be followed by conference calls with smaller shareholders who have quickly built a position and who are also potential activists. (IROs should be tracking changes in institutional ownership on an ongoing basis and therefore already be aware of potential activists.) It is also advised to engage with former top shareholders who have been selling due to differences with management's vision for the company and can be convinced to join other shareholders plotting a proxy contest. Again, let the shareholders set the agenda for the meetings based on the issues they deem as the most pressing.
While it is neither feasible nor advisable for management to enact all shareholders' requests, it is important to understand their view of a company, including its capital structure, management team, corporate governance practices and any other concerns they might have. Management may disagree with potential activist shareholders, but at least they will know what the issues are should a proxy contest be launched.