Current Observations
Boards are and will continue to face increasing scrutiny/pressure by “Activist Shareholders.” Most boards continue to view this as a distraction and not constructive. We have observed that investors become demanding when they sense a board is more interested in their own sustainability rather than considering views on how best to effect value.
Can boards benefit from shareholder activism?
Most Directors based on our recent informal survey ascribe general negativity to their motives of placing their interests above that of all shareholders. To many directors, activist shareholders present a “black box” challenge. The question most often asked after a 13D is filed is, “What do they want?”
This reaction is tilting boardroom discussions toward a bunker type mentality with less of an emphasis on longer term value strategies. This translates to changing the gearing of how boards view and address enterprise risk and opportunity.
Yet, clearly, not all activists are the same i.e., Bill Ackman or Carl Icahn.
Some operate as sledgehammers and proponents of a onetime value event by seeking to “adjust” the balance sheet.
Others, such as Peltz and May at Trion, are “income statement investors.” They focus on operational improvements seeking to provide their investment leadership with optics based on well-researched business model considerations, not geared to onetime events like a spin off or a company break up.
Privately, several Chairpersons agree that activism may be useful as a lightning rod for candid conversations, discussions that they were reluctant to hold previously, among independent board members and between the board and its CEO.
Four Recent Trends
**Board of Director Turnover
We expect that board of director seat turnover will accelerate soon due to the time commitment of governing more complex matters…enhanced regulations requiring more diligence, the impact of activist shareholders, as well as the general and reputational risk associated with board service.
**Activists Are Impacting Director Elections
Boards, with increasing frequency, are seeking directors who (beyond competence and compliance) possess prior experience with boards that have dealt effectively with activist matters. They seek experience/guidance from a director who knows the drill and can opine on the process and professional resources to guide a board when activists, however different, “come a knocking.” In fact, we have a few of these director recruitments currently underway.
**Increasingly, Boards are separating the Chairperson and CEO roles.
Many of our clients perceive this separation as inevitable. And, as a Chairperson/CEO departs, increasingly boards are not offering the chairpersonship to the newly recruited/elevated CEO, utilizing the recruiting process as a way to easily separate the two.
We sense that the “proxy influence” of ISS and Glass Lewis is waning after the resounding defeat of the nonbinding proposal to split Dimon’s roles at JP Morgan Chase. Increasingly, institutional investors seek specific governance and a leadership structure that works best for their company and its circumstances over an inflexible prescription that should be adopted by all.
**Dodd Frank continues to be the “BIG” elephant in the room.
Boards are increasingly concerned about how these new regulations will impact governance. In anticipation, we have observed that Nominating Committees are seeking to strengthen their Audit and Compensation Committees as they consider the qualifications of to be recruited directors. Establishing/strengthening Risk Committees is under consideration at many of our clients.
About us…The Koblentz Group is a global executive and board of director search firm specializing in recruiting senior leaders and corporate directors. Over the past 30 years, its Partners have successfully conducted several hundred “sensitive matter” board recruitments for public companies, investor owned and private concerns. The Firm serves its clients worldwide.