How Activist Investors Scrutinize Your Company

Are activists your friends—or are they foes? It’s a matter of perspective. In the eyes of shareholders, the real issue is that if directors would think and behave more like activists, then there would be no need for activism. But what does thinking and acting like an activist mean?

While attending several corporate governance events over the last year, I heard  many directors say that activist nominees who join their boards tend to have better information and analyses than anyone else on the board. Imagine sitting in a meeting with your peers, people you’ve been working with for years, and in walks a newcomer armed with insights neither you nor your fellow directors had considered.

What kind of insights? Although for obvious reasons the directors I speak with tend not to share specifics, I gather that a significant portion of the superior insight comes from diving deep into publicly available data – scouring the footnotes, creating year-over-year comparisons, and asking questions designed to identify opportunities for unlocking value.

What kind of questions? Peter Tague, vice chairman and co-head of Citigroup’s global M&A department, outlined a set of signposts that activists use to determine whether a campaign is warranted. Those signposts, spun another way and elaborated upon, become a set of questions you and your fellow directors can use to step into the shoes of—and think like—an activist.

  • How do critical metrics like return on invested capital or total shareholder return compare to the industry?
  • Is there a strong strategic case for keeping multiple lines of business together? What’s the overhead associated with supporting tangential businesses?
  • Are you over or under leveraged in your balance sheet?
  • Do you have a record of missing your guidance?
  • Does your board or management team have a long tenure?
  • Does executive compensation fairly correlate to shareholder returns?
  • Should we issue a special dividend or share buy back?
  • Are there assets we should sell that are not related to the core business?
  • Would a stockholder consider our CEO to be doing a good job? Is the dialogue positive about their performance? Can it be perceived externally that management failing?
  • Are there directors whose experience is no longer applicable or relevant to our business model?

The list of questions is by no means complete, but the very act of asking the questions, and the answers you uncover, will arm you with at least some of the crucial insight to which activists who might be considering your company have on hand.

In the next post of this three-part series on activist investors, get an idea for how you can fulfill your duty and “think like an investor” in just 10-15 minutes a day.