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Column
Think about ways to deactivate your activist investors that go well beyond the obligatory and ceremonial. By Constance R. Dierickx Recently, a board chairman repeated a Lyndon Johnson quote to me: “It’s better to have your enemies inside the tent pissing out than outside the tent pissing in.” The chairman was referring to the manner in which he handles a challenging relationship with a particular group of shareholders. Though he cited the quote, he does not actually see shareholders as “the enemy.” The quote is a reminder to himself that the shortest trip to an adversarial relationship is to see shareholders as a needless bother. Any director can tell you that dissident shareholders are not new. However, turmoil at prominent companies like Home Depot and many others shows that major investors are voicing their dissent more forcefully than ever before. When these shareholder disputes take place on the public stage — amplified by blogs and backed by hedge fund money — a company can sustain significant damage to its reputation, not to mention its stock price. This chairman I mention has been successful in his shareholder relationships because he has made peace with an important fact: While he and his colleagues oversee the company, it does not belong to them. He not only knows it’s not his company, he acts like he knows, and he demands that his colleagues do the same. His beliefs inform his decisions, and they embody his attitude of servant leadership. He sets a clear tone at the top that his direct reports model throughout the company. Rather than viewing activist shareholders as a nuisance or a hurdle to overcome, directors should be asking themselves, “How can we work with this new breed of shareholders?” Spotty Performance RHR international’s 2007 survey of over 400 public company directors indicates that the overwhelming majority (98%) believe they are doing a good job. Yet when we probe them to report on specific key behaviors associated with good governance, the performance of this same set of directors seems to be spotty at best. The behaviors we know to be aligned with strong governance include succession planning, rigorous CEO performance evaluations, and insistence on clear and honest board evaluations rather than platitudes and self-congratulation. Shareholders can — and should — assume that these activities are an integral part of good governance at the companies whose shares they own. If directors and senior management do not demonstrate these behaviors, then they should expect that their shareholders will ask pointed questions. When their questions are not adequately answered, shareholder opinions generally become more vociferous and sometimes unreasonable, fueled by frustration and suspicion. In other words, in a company with good governance practices, it pays to manage shareholder concerns responsively; managing them poorly can raise needless and expensive issues. Aside from a change in attitude as evidenced by my chairman friend, what tangible actions can corporate directors take to deactivate shareholder aggression? Face-to-Face Meetings First of all, we advise that companies show respect for shareholders by inviting them “under the tent” in ways that go well beyond the obligatory and ceremonial. Part of this is as simple as facilitating face-to-face meetings between shareholders and board members or key executives. Also, you might consider inviting shareholders to major company milestone events or product launches; making them feel included goes a surprisingly long way. When spending this extra time with shareholders, it is important to listen as much as you talk. While management may still disagree with their opinions, it is important to ask questions to understand exactly what lies at the root of their concerns. While it is important to make shareholders feel they are part of company ownership, directors need to ensure limits are set in these conversations. Clearly state what cannot be openly discussed and why. This may include plans for acquisitions or important management team changes, for example. While it may seem counterintuitive, clear and reasonable boundaries inspire confidence, as opposed to suspicion. Maintaining productive, nondysfunctional working relationships among board members is equally as important as developing positive relationships with activist shareholders. Our director survey shows that almost one-third of directors claim they do not use a formal process for evaluating the effectiveness of individual board members, and one-third of respondents do not give each other constructive feedback. How can board members manage shareholders if they’re not already working effectively as a group? No Assumptions In order to present a “united front” to shareholders, ensure that all directors are informed on key matters. Don’t assume that a director is up-to-date on the governance of the company, or that they are aligned with their fellow directors. Pressure test these areas by surveying the board on key topics, such as current shareholder concerns, to make sure the board is functioning well as a unit. One or two disgruntled directors can create a chink in the armor that an activist shareholder will spot a mile away. Directors and senior management can easily avoid shareholders by hiding behind bureaucracy or organizational complexity. Instead, they need to know — and practice — the behaviors that typify good governance, including creation and care of solid relationships with the ultimate decision makers: those who own the company. |
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| Constance
Dierickx, Ph.D., is senior consultant with RHR International. She
provides consultation to directors and C-suite executives to improve
performance, capture opportunities, resolve conflict and recover from
debacles. Dr. Dierickx can be reached at cdierickx@rhrinternational.com. Copyright © 2007 Directors & Boards, P.O. Box 41966 Philadelphia, PA 19101-1966. All rights reserved. Contact the webmaster. < Privacy Notice > |
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