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Feature

William G. McBride
Managing Director
Gavin Anderson & Co.

Girding for a Media Battle with Activist Hedge Funds

Boards grappling with the kind of issues that attract activists should move quickly to shore up their communications capabilities in at least four ways.

By William G. McBride

Hardly a day passes without news of a fresh attack on a public company by activist investors, usually from the growing tribe known as hedge funds. And all too often, the article exposes the company’s lack of preparation for a pitched media battle.

Activist investors rely on negative media to keep the pressure on boards of directors. These antagonists rarely stop at criticizing the company’s business strategy. Boards routinely come in for public drubbings in the media over governance issues like cronyism, executive compensation and accounting practices.

These attacks can drive away more traditional, long-term investors, demoralize employees, distract management from operational responsibilities, invite regulatory scrutiny, increase litigation risk, and even raise questions among customers and business partners about the company’s future.

Even when a company seemingly survives an activist onslaught, reputations can take such a prolonged beating in the media that the board and its senior management lose a significant amount of control over the company’s destiny.

When approached initially by activists, boards sometimes hope they can forestall a public battle with measured steps and quiet contacts, avoiding developments that force regulatory filings and escalation of the debate into a public fight. But directors are often surprised when – in the midst of discreet discussions -- privately expressed criticism surfaces as a public issue in the media.

Activist shareholders simply take advantage of the financial media’s penchant for negative opinion and public fights. Some of these activists are adept at sowing negative articles in the media without being tagged as the reporter’s source. That’s why boards grappling with the kind of issues that attract activists should move quickly to shore up their communications capabilities in at least four ways.

1.    Make sure that management has actively and consistently communicated your company’s strategy.
Failure by management to tell their strategy story widely and well makes it easier for the activists to assert their common claim that the company has no strategy, or, at best, a muddled one. Part of that public dialogue should include a discussion of why management has chosen this particular strategy over alternatives. Companies are often shocked to hear activists put forward as novel, inventive strategies the very ideas that the board and management had already considered and rejected after careful analysis. Boards would be well advised to audit and evaluate regularly the company’s financial communications activities and the public record it has created.

2.    Find out what your current shareholders are thinking.
Many companies have little hard data on why their current holders own the stock. Nor are they well informed about their shareholder’s frustrations or nagging doubts. Left unaddressed, these frustrations and doubts create opportunities for the activists. A discreet, well designed survey of shareholders and other influential groups can provide insights useful for heading off problems and managing the company’s public defense.

3.    Take a cold-eyed look at whether your communications team and advisers are up to a full-fledged media tussle of several months’ duration.
The current team may have excellent knowledge of the beat reporters and local and trade media that cover your company under normal conditions. But when an activist attack breaks in the news media, the team will find itself fielding calls from unfamiliar reporters who cover hostile transactions, hedge funds and governance issues. To complicate matters, these are the very reporters with whom the hedge fund activists have close relationships. To mount an effective defense, you will need battle-tested communications specialists who have the media relationships and knowledge of contentious situations to help your management mount an effective defense. Ideally, they should already be familiar with your company and its challenges before a hostile situation flares in the media.

4.    Educate yourself about your potential adversaries.
The activist hedge fund community is fairly tight knit. While these activist investors take pains to avoid the legal peril of appearing to act in concert, they often have the same informal networks found among any group of like-minded professionals. Many live in the same communities, serve together on nonprofit boards, or formed friendships as colleagues in large investment banks before they struck out on their own. To be effective, your advisers need to understand these connections and how this community operates and leverages its network of relationships with one another and with the media.

The factors driving activist strategies seem likely to remain a feature of the corporate landscape for some years to come. A company’s ability to fend off unjustified attacks and maintain control of its destiny will depend in large measure on how prepared it is to manage through the media maelstrom that activists seek to create.

William G. McBride is Managing Director in the New York office of Gavin Anderson & Co. (http://www.gavinanderson.com), a strategic communications consultancy. He can be contacted at wmcbride@gavinanderson.com.