Balancing Institutional Investor and Activist Demands


Agenda | January 16, 2018

The Agenda article, “Balancing Institutional Investor and Activist Demands,” was co-written by Russell Reynolds Associates Consultants Anthony Goodman and Jack "Rusty" O'Kelley III and discussed how directors can balance both investor and activist demands. The article is excerpted below.

With increasing pressure on public companies, many directors find themselves facing the following dilemma: Institutional investors want them to craft strategy that creates long-term shareholder value, while activist investors often call for short-term value-enhancement actions. This puts many directors between a rock and hard place.

At the end of each year, Russell Reynolds Associates interviews more than 30 institutional and activist investors, pension fund managers, proxy advisors and other corporate governance professionals regarding the trends and challenges that public company boards will face in the coming year. This year a prevailing theme was the importance of board quality and composition. Another key theme is how boards should prepare for and respond to the increasing occurrence of activist investor campaigns.

Given the closeness of the proxy vote and the eventual appointment of Nelson Peltz at Procter & Gamble in a recent proxy contest, no company, regardless of scale, should feel safe from an activist intervention. Additionally, given the example of Bill Ackman and ADP, even companies that are performing well may be targeted.

Responding to Activist Campaigns

In 2017, the top five global asset managers controlled more than $8.2 trillion of equity investments. As index tracking funds become increasingly popular investments, asset managers with large index funds are required to hold equity from each company in the given indices.

Given their mandate to hold a particular index stock for many years, institutional investors want to ensure that the companies in their portfolios make decisions that drive long-term profitability. Many institutional investors have ramped up their governance functions and are demanding more direct board engagement.

Activist investors, on the other hand, can often have shorter time horizons for return on investment. Activists often develop a deep analysis of a company and many times have thoughtful ideas for improving performance. The companies that have had the most success navigating activist campaigns have been those with boards that are willing to engage in a meaningful dialogue with the activists.

An agreement to explore or implement ideas to improve performance is not the same as a deal to add activist nominated directors to the board. Institutional investors are increasingly concerned with the speed with which boards settle with activists whose goals may clash with the expectations of long-term investors.

Full texts of articles from Agenda can be found here.

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Balancing Institutional Investor and Activist Demands