The activists are at the gate

Campaigns have become easier to finance and launch, thanks to the wide availability of contracts for difference and recent changes in corporate governance. In addition, the internet and the facility it provides to disseminate stories and take control of the narrative has meant that restless investors, which management teams could easily ignore in the past, yield a disproportionate influence on a board and its cash flow distributions.

The simplest definition of an activist is an investor who seeks to drive changes in a company’s strategy, structure or governance to enhance shareholder value. In the old world, when those investors had to own significant amounts of stock to have a voice and yield influence, it was easier to ensure that their aims were more closely aligned with other shareholders. However, that changed with the emergence of new funding mechanisms and it is now regarded as a specialist investment strategy. These mechanisms can bring leverage to the activists’ returns, which means that their investment horizons can be much shorter  and, as such, less aligned to other long-term shareholders.

Activist investors engage with a company’s management and boards of directors, often challenging their decisions and advocating for changes such as cost-cutting, asset divestitures, leadership changes or returning capital to shareholders through dividends or buybacks.

They gained prominence in the 1980s with figures like Carl Icahn, but the 2000s saw a significant rise in its prevalence. Hedge funds like Elliott Management, Starboard Value and Pershing Square Capital Management have pioneered modern activist campaigns, leveraging sophisticated research and public relations strategies to influence companies. Their rise is driven by factors such as increased institutional ownership, greater shareholder awareness and regulatory changes encouraging investor engagement. Additionally, digital communication and social media amplify activists’ messages, making it easier to sway public and shareholder opinion.

For management teams, activist campaigns can be disruptive, leading to reputational risk and potential loss of control over strategic decisions. Ask any management team who has engaged with an activist and they are likely to say the experience was disruptive, distracting, time consuming, expensive and bruising.

However, activism also presents an opportunity to align company strategies with shareholder interests and unlock value.

Defending against activist investors

The best form of defence is avoiding an approach in the first place. Know what shareholders are expecting, clearly communicate your strategy and control the investment narrative.

A failure to plan is a plan to fail

To prepare for and potentially counter activist investors, management teams can adopt several proactive strategies:

Engage with shareholders regularly: maintaining open, transparent communication with investors helps build trust and reduces the likelihood of surprises from activist campaigns. Proactively addressing shareholder concerns can also pre-empt activism.

Conduct vulnerability assessments: companies should regularly assess their strategic and operational performance from an outsider’s perspective, identifying areas that might attract activist attention such as underperforming assets or poor governance practices.

Strengthen governance practices: boards should comprise diverse, independent and skilled directors who can defend against undue influence. Clear governance policies and robust decision-making processes are critical.

Develop a defence playbook: having a contingency plan for dealing with activist approaches, including communication strategies and legal resources, allows management to respond swiftly and effectively.

Focus on long-term value creation: demonstrating a clear and compelling strategy for sustainable growth helps mitigate claims of mismanagement. Sharing this vision with shareholders ensures alignment and reduces the appeal of alternative proposals from activists.

While activist investors can uncover genuine inefficiencies, they often push for short-term gains at the expense of long-term stability. By proactively addressing vulnerabilities and maintaining strong investor relationships, management teams can mitigate risks and retain control over their strategic vision.

• The different types of activism – stealth/public/campaigning.
• The importance of ‘sunshine planning’, being prepared, know how to respond, and who is best placed to respond. Staying on the front foot.
• Identifying board members to take a lead should an activist make contact, perhaps those who have experience of managing activists.
• Thinking about providing a formal written response and trying to manage the timeline in such a way that you can control the discussion.
• Activist funding – understanding the use of contracts for difference to gain leverage.
• The importance of shareholder engagement and governance – run regular perception feedback reports and know your weak points.
• Considering appointing defence advisors to help create a defence plan.
• How to spot activists – often they hide behind a prime broker.
• Running specific screens and scenarios in preparation.
• Being aware that more than one activist can turn up at a time.
• The need to think differently – often these are not like takeover approaches where you can be bound by a clear timeline and outcome. Campaigns can last months, with multiple potential outcomes.
• Whether activists should be invited to the board, thereby offering inclusivity but also bringing them more into alignment with other shareholders.