At least annually, directors and management should review their operations, corporate performance and disclosure practices, and develop contingency plans should an activist start acquiring large blocks of the company's stock.
"You don't want the board to have a sense of panic or alarm," said Ethan A. Klingsberg, a partner in the New York office of Cleary Gottlieb Steen & Hamilton, at PLI's 46th Annual Securities Regulation Institute. "That's not a great way to explain a situation to shareholders."
Klingsberg suggested companies should, for example, review operations likely to attract activist attention, such as a division that may be a candidate for a spin-off.
It can also be helpful to arrange meetings with board members and institutional investors so they have better relationships as well as a clearer understanding of the company's plans and operations, said Daniel H. Burch, chairman, CEO and co-founder of proxy solicitation and investor relations consulting firm MacKenzie Partners, Inc.
Activism Rising
Companies are paying closer attention to activist shareholders, who are trying to flex more muscle in situations where they believe a company or division is underperforming its peers.
In 2010, activist investors launched 120 campaigns to replace directors at companies, according to Thomas A. Cole, a partner with Sidley Austin LLP. This year, that number will reach an estimated 164 campaigns.
Similarly, the amount of assets being managed by activist hedge funds has more than doubled in four years, growing from $46.8 billion in 2010 to $110 billion in the second quarter of 2014.
The increase has been driven by several factors, including a desire to unlock value that investors believe is being suppressed, either by improper management or ineffective corporate performance.
Brian L. Schorr, chief legal officer and a partner at alternative investment firm Trian Fund Management, L.P., said his company reviews income statements, analyst reports and peer benchmarks to identify companies it believes should be performing more effectively.
"We try to invest in companies we understand, in industries we understand," Schorr said. "We try to work constructively with companies -- often with the boardroom, and sometimes within the boardroom, to unlock value gaps."
Shareholder Receptivity
Another factor driving growth in shareholder challenges to management is an increased receptivity to activism among institutional investors.
Donna F. Anderson, a vice president and global corporate governance analyst for T. Rowe Price, said large investors are often willing to meet with activists to gain their perspective.
"Why wouldn't we be open to somebody who has a different view of a company in which we have a large investment? We'd look at that as part of our due diligence."
Saying that most want to avoid the distraction and cost of a proxy fight, Anderson added a growing number of institutional investors often see little downside to adding an activist to a company's board.
Schorr said when his firm approaches a company, a board seat is not a prerequisite. If a company's management meets with them and shares their views, they're willing to offer operational advice without seeking board representation.
Not that having an activist on a board is always a challenge to management, the panelists agreed.
Klingsberg said while there are exceptions, directors aligned with activist investors tend to study corporate information carefully and ask pertinent questions during board meetings.
"Don't underestimate how effective an activist can be as a director," he said.
Klingsberg said bringing in an activist director can also help improve a company's reputation for being willing to work with shareholders.
All of which should be discussed as part of a company's strategic review and contingency planning with board members. By outlining likely approaches and potential responses ahead of time, a company can reduce the risk of acting imprudently if it is challenged by an activist.
"Directors are often more hawkish than management, and it's helpful to develop a measured response [to an activist]," Burch said. "You're probably going to have to get along with those people. If someone owns 5 or 10 percent of your company, they're not going to go away overnight."