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| Best Practices: On The Board |
Wolves at the Gates
Michelle Leder
12/01/2006
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In 2005, Cannell targeted Manhattan-based BKF Capital Group
with a scathing letter that used the words "comic monkeyshines" to describe the
company’s long list of related-party transactions. The letter started by quoting
Cicero’s words regarding corruption in ancient Rome, and went on to chide BKF
over its lavish office space at Rockefeller Center. It even included a bit of
self-deprecating humor: "The callous conflagration of shareholder assets by BKF
galls us, as it would gall Cicero. When we visit companies, we stay at $39.95
motels, not fancy hotels with fruit at the reception desk. If the bathroom
glasses are not wrapped in paper, we flee. We are not squired around in Lincoln
town cars driven by perfumed manservants."
"We are not squired around in Lincoln town cars driven by perfumed manservants." |
The meaning of the word "bloated" is open to interpretation.
While staying in five-star hotels on business trips would not in itself be
enough to draw Cannell’s ire, almost any firm can be fair game if its share
price does not consistently beat the market.
The Best Defense
If an activist investor knocks at your company’s door,
directors and senior managers may be able to keep a shake up at bay, at least if
the company has a reasonably strong business plan and the share price is not
tanking. Securities laws require all investors to alert companies when they make
large investments. Anyone who accumulates more than 5 percent of a company’s
outstanding shares must file a Schedule 13 with the SEC and send a copy to the company’s board. An investor can file either a 13-G, which indicates a passive
investment, or a 13-D, which indicates an active investment. A 13-D could be a
warning sign. Sometimes the form arrives with a letter declaring the investor’s
hostile intentions (see "Poison Prose"), but most activists will try to
negotiate before resorting to open warfare. At Knight Ridder, for example,
Sherman asked to meet with the company’s directors months before he sent his
letter calling for radical changes.
These investors want a response. Often they do not get it. A
report that the investment bank Morgan Joseph released in July discussed some of
the means companies possess to thwart unwanted activist attention. "While a
healthy stock price is the ultimate defense," noted S. Randy Lampert, managing
director in Morgan Joseph’s corporate finance department and co-head of the
firm’s Shareholder Activist Group, "a proactive stance and prompt response to
activist approaches can also be highly effective."
Activist investors have been known to contact board members
individually. They might be trying to divide loyalties. The board’s best stance
is to call an emergency meeting and designate a board member to meet with the
investors. This can be a meeting without top management, although the CEO and
CFO should be kept apprised and should also meet with the investors. Early
discussions might lead to an agreement, especially if the representatives from
the company can show that they are implementing strategic, financial and
operational moves to improve the business. Everyone on the inside should be
prepared, however, to disclose important initiatives that are in the works, even
if the company was not prepared to release the news just yet.
Early meetings also give an opportunity for the board members
and senior managers to determine the investor’s true intentions, and discover
whether the activist investor is drawing a distinction between real enterprise
value and the share price. Both sides ought to act constructively, with the
patience to wait out changes that might cut into investment returns over the
short term but produce long-term gains. It takes a bold CEO, of course, to tell
any investors that they will have to live with short-term cuts, let alone a
group of investors known for their bullying tactics and public denunciations.
On the other hand, activists are typically investment pros, not
experts in the nuts and bolts of the industry in question. If a fund manager and
a group of his handpicked advocates penetrate the board, they will, like any
directors from the outside, face a learning curve. They would, in most cases,
prefer to be reassured that the existing board and managers have brilliant
ideas. So would other shareholders, employees and the community; it is important
to have both a substantive vision and a skillful communication strategy. The
board should be armed with these weapons at the first sign of predators hovering
about, if not before.
Michelle Leder is the author of Financial Fine Print: Uncovering a Company’s True
Value.
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