by Cydney Posner
The recent PwC survey of almost 800 directors of public companies contains some interesting data on directors’ views of communications with hedge fund activist and institutional shareholders, as well as proactive approaches to mitigate the risk of an activist challenge. (For survey results regarding board diversity, see this PubCo post.)
As expected, the level of director communications with institutional shareholders has increased from 2012, up from 62% to 69%. More significant perhaps is the change occurring in the breadth of topics that directors are now willing to discuss. Although it‘s still the case that “shareholder proposals” is the only topic that more directors view to be “very appropriate’’ for discussion (44%) as compared to “somewhat appropriate” (42%), the percentages registered for “very appropriate” increased across all topics. Similarly, the percentages of directors viewing any of the surveyed topics as “not appropriate” decreased across the board. To unpack the numbers, the survey indicated that, for 2015, 77% of directors believe it is at least “somewhat appropriate” to discuss executive compensation with shareholders compared to just 66% in 2013. Similarly, 66% of directors now believe it is at least “somewhat appropriate” to discuss company strategy development and oversight, compared to only 45% in 2013. The survey also showed an increase from 46% in 2013 to 66% in 2015 in the percentage of directors that believe direct shareholder communications regarding the use of corporate cash and resources to be at least “somewhat appropriate”; the survey speculates that the increase “may be a response to the concern many activists have expressed about dividends, stock buybacks, and other uses of cash.” Relative to data for 2014, board composition and management performance are two topics that saw significant increases in the percentages of directors who view them as “very appropriate” topics and significant declines in the percentages that view them as “not appropriate.”
The survey also noted that more boards are developing policies and protocols for engaging in shareholder dialogue; over 60% of directors responded that their companies have “established or discussed protocols and practices regarding both the permissible topics for discussion between directors and shareholders as well as the process by which shareholders can request direct dialogue with the board.”
It should come as no surprise, given the increase in hedge fund activism, that boards have become increasingly involved in direct discussions with activists as well as in considering proactive steps to deter them. This year, 49% of directors responded that they had “extensive discussions” on their boards about activism, compared to 43% last year. The percentage who also had interactions with activists rose to 32% from 29%. The percentage who were not concerned about activism and had no board discussions decreased from 18% in 2014 to 15% this year. The survey also notes that the industries in which directors were most likely to have had activist interactions were the software, media and pharmaceutical industries (67%, 67%, and 52%, respectively).
With regard to proactive approaches designed to mitigate exposure to hedge fund activism, 69% of directors surveyed reported that, during the preceding 12 months, their boards regularly communicated with the company’s largest shareholders, and 56% reported that their companies used a stock-monitoring service to receive regular updates on stock ownership changes. During the same period, 55% reported that their boards reviewed strategic vulnerabilities that could be targeted by activists, 37% engaged third parties to provide advice on potential activism, 33% revised executive compensation structures and 20% changed the composition of the board as a protective measure. The survey notes that larger companies tend to be more proactive with regard to activism: directors at “mega-cap” companies said that they engaged third-party board advisors to address potential activism at a rate that was 20% higher than directors of small-cap companies.