If there were such a thing as a playbook for dealing with shareholder activists, it would be required reading for all officers and directors of public companies. In the past 10 quarters, there have been more than 200 activist campaigns at U.S. public companies with market capitalizations greater than $1 billion. Even well-performing companies with strong balance sheets, excellent management, a disciplined capital allocation record and above average operating performance are not immune to activist threats.
Activists no longer need to have a large stake in a target company to drive major changes, either. Institutions hold more than 63% of shares outstanding at S&P 500 companies, in contrast to the 1980s, when institutional ownership never crossed 50% of shares. Thirty years ago, it would be rare for a large institutional investor to side publicly with an activist, but recently, major institutions have frequently sided with shareholder activists and even privately issued “Requests for Activism” for portfolio companies. In 2013, ValueAct Capital President G. Mason Morfit forced his way onto Microsoft’s board and reportedly helped oust longtime CEO Steve Ballmer, all while holding less than 1% of Microsoft’s outstanding shares. Morfit pulled it off because ValueAct had powerful institutional allies that were willing to flex their voting muscle.
How can companies defend themselves against an activist campaign—or at least encourage the activists to knock on someone else's door? By being prepared with the following ten strategic building blocks designed to ward off the threat.