Preparing for impact: The rise of shareholder activism across Europe

Shareholder activism is on the rise and has reached Europe at full speed.

Though often associated with US boardrooms, activists’ pushes to force strategic and corporate management change mean that, so far this year, $7.2 bn has already been spent on campaigns – with Europe now seen as a prime target, according to Lazard’s 1Q 2018 Activism Review.

The figure, which suggests 2018 may surpass 2017’s record numbers, underpins the efficiency with which activists spend capital, leveraging their credibility with traditional investors to get corporate boards to reshuffle their proposed business strategies in order to improve returns.

Looking beyond sums, however, the data reveals a much broader picture of what is taking place in boardrooms and at AGMs around these shores. A key finding is that shareholder activism in Europe is on the rise, with the UK being the most targeted country.

For example, the likes of Whitbread, Hammerson, Barclays, Sky, GKN and Micro Focus have all recently been placed on activists’ radars and have either been the target of a campaign or seen activists build a stake in their business.

Forcing change

According to the research, the majority of shareholder activism actions in Europe have been driven by Elliott Management, Sherborne Investors and Cevian Capital. These groups have been looking to break into the European landscape in their drive to find attractive valuation entry points and opportunities to enhance shareholder value.

But there are also home-grown players in the UK that are contributing to shaping up this landscape. Perhaps the one that got the most media visibility recently is The Children’s Investment Fund, which got involved in the governance crisis at the London Stock Exchange Group (LSEG) at the end of last year.

Whether its involvement led to the aimed result or not is almost secondary, as other shareholder groups took part in the fray. The takeaway is that, wittingly or not, the whole issue was played out in the pages of the national media. This placed an unwanted spotlight on LSEG and saw its reputation challenged in the face of investor pressure. But what could LSEG have otherwise done to avoid it?

Proactivity is the best form of prevention

As is frequently the case, companies of all sizes and sectors need to consider the impact sudden challenges can have on their business’s reputation and, ultimately, value. Activist moves by interest groups at any given time are not something that is always avoidable, but unpreparedness to face them is.

The main reason boards acquiesce to listening to activist groups is not only to increase the level of engagement with their shareholders but also, more importantly, because by paying attention to the concerns of investors, directors may avert future trouble. If for no other reason, such a strategy helps boards better analyze management’s actions at the companies they oversee. This, however, is not enough.

Planning will do it

To effectively tackle an activist campaign, companies must have a contingency plan that anticipates and prepares them to quickly respond. To achieve this, firms should evaluate all their business lines, looking for underperforming components and evaluating risk factors.

Having a structured communications strategy not only helps, but is also key to ensure corporate messaging aimed at both internal and external stakeholders is aligned with previously announced strategies – relaying a sense of continuum, rather than disruption.

As PwC points out, a good exercise is for companies to place themselves in the position of the activist, considering its ideas and identifying areas of common ground between the company’s position and the activist’s demands.

Above all, companies should have a comprehensive understanding of their shareholder base and a tailored engagement plan that shows management and the board are aligned in their commitment to delivering shareholder value.

Conclusion

A very well-structured and thought-through reactive strategy is, therefore, paramount for a business to swiftly respond to activists’ moves before too much damage has been done to the firm’s brand value.

No company, listed or private, is impervious to the possibility that someday its shareholders will question its management decisions publicly, rather than privately. To have on your side a team of well-versed advisers with experience in tackling crises is important.

Businesses might not know when challenges will arise, but a lack of preparedness should never be the excuse that justifies why activist shareholders succeed in steering companies in a different direction from that set out by management in the most public way.

Rui Videira is an account director at Instinctif Partners