Are Directors and Executives Really This Obtuse?

Tuesday, November 12, 2013

Sometimes we read stuff about how company leaders think and work, and even though we think we’ve seen and heard just about everything we could, it still surprises, amazes, and disappoints us.

The latest news entails how companies have lately thought about activist investors. The New York Times reports, evenly and fairly, on a range of tactics gleaned from several different companies and their advisors.

Their language betrays the approach and perspective, though:

❖ activist investors are “a new threat” leading to “paranoia”

❖ companies “calibrate defenses” to “withstand the assault”

❖ communicating with investors becomes a “situation” that “is resolved” by “defusing tensions”.

The article catalogues how companies have prepared for this “situation” - they “conduct a handful of exercises”:

❖  prepare in advance before activists “even show up”

❖  assemble a team including executives, investment bankers, attorneys, and PR firms

❖  beef up IR

❖  assess stock price performance, cash balances, and BoD age and engagement

❖  invite an activist investor to speak to the BoD

❖  have investment bankers write a mock letter from an activist investor, then rehearse responses

❖  “remain ... cordial ... to avoid appearing dismissive of ... shareholder concerns” 

❖  have the BoD Chair, CEO, and CFO meet with investors, instead of just IR staff

❖  sell divisions or return capital (buybacks, dividends).

Companies do this because “the level of sophistication of the activists has increased.” Investors now retain investment banks to analyze companies and executive search firms to recruit director candidates, so “the quality of their board candidates is increasing.” One advisor sums up this program as becoming “white-paper ready”.

This list summons a range of reactions, none good:

❖  C’mon, this isn’t an earthquake or fire, it just takes relating well to a company’s owners and the CEO’s employer

❖  What does the investment banking/legal/PR team cost?

❖  Are investors simply an ungrateful nuisance that “shows up”?

❖  Does it truly require extra effort from mature, adult businesspeople to treat investors cordially, such that directors must, insincerely, avoid appearing dismissive, when they would merely prefer to dismiss?

❖  We’d love to know which activist investor actually met with a company BoD, and why. What was in it for the investor?

❖  Role play a discussion with an activist investor? Really?

More to the point, companies these days will sell businesses or pay out cash to investors to “quell dissent”. Shouldn’t they do this because investors want it?

And, investors have become more sophisticated activists because we’ve had to. We spend this considerable time and money on activism because companies have failed to respond to more conventional means of exercising shareholder rights.

It beggars belief that directors and executives think that this use of time and money serves investors well. Instead of staged, pretentious communications that disguise only contempt for investors, a BoD and executive can and should do better.

Of course, the best investor relations is a soaring share price. Not every company can have that situation every day, so short of that, how about:

❖  Open, honest director elections

❖  Frequent, substantive, and candid discussion of company results

❖  Sincere inquiry into investor goals and preferences for a business, and diligent effort to incorporate these preferences and meet these goals

❖  Real and reasonable executive and director pay-for-performance.

Instead of papering over a companies “vulnerabilities”, we’d love to see BoDs and executives make a serious effort to meet investor needs, rather than their own. But, obtuse people fail to see that investors have become more serious because of corporate failure to work with investors, and then think that these insincere measures will make a difference.

Copyright 2008-2010 Michael R. Levin - all rights reserved.