What's the point of activism defense?

A lot of banks advise boards on defending against activist investors. I'm curious, if the goal of an activist investor is to unlock shareholder value, why do companies pay advisors to fight them? By paying fees to do so, isn't this essentially acting against the best interests of the shareholders?

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Jun 3, 2018

Common misconception that activists are always acting on behalf of all shareholders. They are acting on behalf of only themselves and to make a return. I've seen situations where activists were pushing for action that would be detrimental to shareholders in the mid/long-term. I've seen situations where activists pushed for a different (better) return profile for themselves vs common shareholders. I've seen situations where it was probably a good thing that an activist jumped in. Ultimately, activists are generally opportunistic investors that seek to generate returns sooner rather than later where they can make an argument for underperformance. This underperformance can be temporary, situational or structural. Activists are most helpful when there are structural issues causing underperformance and there is an ineffective governance structure to enact change. If the rest of the shareholder base happens to benefit from the activist's actions as well, great (also makes it easier to fight those proxy battles). If long-term shareholders lose but the activist gains, they don't care either.

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Jan 3, 2019

Don't you think management is short-term oriented too? Say you're a CEO making 20x what you would make if you weren't a CEO. Note that very few CEOs are able to get another job as CEO.
So if you can make your CEO gig last one more year, you're covering 20 years of post-CEO income. What are you incentivized to do? Certainly not take risks to maximize value. You're much better off diversifying your revenue by buying up different unrelated businesses and building a nice little stable empire. Shareholder value slowly erodes over time and your options may not be worth as much, but that pales in comparison to another couple of years of making 20x what you'd otherwise make.

Jan 3, 2019

I think your assumption that CEOs are not paid a market rate is flawed. Many of them are overpaid, but there's an ocean of CEO comp data that boards and headhunters rely on to attract and retain CEOs. In theory, if a CEO can make $10 million a year at company X, he or she can command the same thing at a different company.

Jan 3, 2019

Again, CEOs rarely get another CEO job after stepping down.

It makes sense when you think about it. We're talking about a single job at the top of a company. Firm-specific capital plays a huge role. Why hire an outside CEO if your COO, or CFO, or head of whatever, is considered a rising star. There's not an open market for CEOs like there is for most other jobs. Especially at the largest companies.

As for comp data: guess what comp committees do with this data. They look at the industry median and set their own CEO at the median or above. If he's unusually strong he gets near the top, and if he's weak he gets the median. Median of course can't remain the median if everyone is above it, so end result is a ratcheting-up of CEO pay much faster than company value.

Board members also like to keep their jobs (and get other seats) and making enemies with the CEO isn't a great way to do that.

But above all, let's just be realistic. We know there's very few CEO jobs. We know that any given CEO has only a small handful of truly comparable companies in his sub-sector. And even then he needs to compete with all the rising star non-CEOs, especially at the company where an opening may come up. Certainly you can at least acknowledge that any CEO faces a strong possibility of taking a 90% pay cut should he be fired. Few jobs are like that. It's not unlike the pro athlete who is incentivized to stay healthy, even at the expense of performance, for that one last big contract

Jan 3, 2019
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