Conflicted over NIRI’s activist investor survey

By Dominic Jones

I’VE BEEN thinking about the National Investor Relations Institute’s (NIRI) executive alert this week on how investor relations professionals should deal with activist investors.

Almost half (47%) of the 465 IROs who responded to the survey said that an activist investor has held their stock. However, when it came to ways that companies reacted to activist investors, only a quarter said they initiated communications and actively engaged the investor. A further 8% just ignored the investor (at least they’re honest about it).

Two-thirds (66%) of the respondents said they waited for the activist investor to contact the company first, which usually came via a phone call or a mailed letter to the IR department. Only 2% said activists contacted them by email.

Of course, the lack of proactive engagement probably is because most IROs don’t know they are in the crosshairs of an activist investor until they get the phone call or letter. That’s what 60% of small-cap, 52% of mid-cap and 58% of large-cap respondents told NIRI.

What if the activist investor is right and management sucks?

In light of this, NIRI thinks IROs should be more proactive in identifying and engaging activist investors. However, it’s not clear to me that the motivation for “engaging” activists isn’t merely a ploy to neutralize a threat. Keep your enemies close, and all that…

There seems to be a camp among NIRI members who are all about defence. They’re  mostly reactive rather than proactive.

They suggest things like “being vigilant for unusual stock trading activity, or contacts from known activists.” Or doing “your homework on the activist and their previous campaigns.” And creating a “strategic preparedness team” to respond to activists.

Nothing intrinsically wrong with that advice — if the company is meeting the expectations of most of its shareholders. But I get uncomfortable with such advice when there’s a chance that the activist investor might be right and management is wrong.

Do IRO’s have an obligation to bad management? Or is their ultimate obligation to the shareholders? In cases like these, if the IRO has done his or her job, shouldn’t they be comfortable leaving any decision about the merits of the activist’s case to a vote of the shareholders, assuming the activist is motivated to go that route?

Proactive communications with all investors, all the time

There’s another camp in NIRI that I feel much more comfortable with. This camp thinks that it shouldn’t matter who owns your stock so long as you’re telling your story honestly and effectively and demonstrate genuine respect for your shareholders.

If you do that, then it’s going to be hard or impossible for an activist with impure motives to get the time of day from the board, management, and most other shareholders.

NIRI’s alert does recommend that companies “maintain good lines of communications with traditional shareholders.” And it urges IROs to “focus communications with investors on how the board and management are managing the company for the long-term benefit of all shareholders.”

It even quotes one respondent from a company saying something I wish I’d said:

“Create an active outreach program that communicates your company’s long-range strategy to your investors before an activist investor appears. Create credibility before the crisis, not during it. Be ready to engage the activist investor and defend your management’s long range strategy as long as that strategy is in the best interest of your shareholders.”

Of course, if management is running the company into the ground and the board is not minding the store, then no amount proactive outreaching is going to help.

In those situations, that phone call or letter from an activist might best be greeted by big sigh of relief.

So I’m not sure how to think about this survey or NIRI’s advice. Hey, this is a blog and no one says there always has to be a firm conclusion.

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