In collaboration with The Boston Consulting Group and RBC Capital Markets, our Canadian Special Situations Team has released a paper offering a fresh perspective on defensive strategies addressing the spectre of shareholder activism. The paper argues that in developing a sound defense, good governance practices are vital, but should not be relied upon as a company's sole fortification. The most effective defense is to create sustainable shareholder value. This value creation should be facilitated not by enhancements in oversights, controls and disclosure, but rather through a board's more active engagement with management, strengthened by a more fulsome understanding of the company's stakeholders and its strategic alternatives.
The key to this engagement is to enhance the role that board members play in scrutinizing a company's value creation alternatives and strategy development, empowering the board to think like an activist investor, rather than being a passive recipient of periodic financial results and strategic plans. Leveraging the range of experience that board members bring to the boardroom, directors are encouraged to become "thought partners" with senior management, increasing their understanding of value creation alternatives. One mechanism to achieve this may be through the formation of a committee of board members with specific oversight responsibility analogous to that of an audit committee over financial affairs. An example of a charter setting out a suggested mandate for such a value creation committee is available here.
In concert with the enhanced engagement of board members, the paper calls for boards to ensure that management carries out a minimum of three primary responsibilities in its quest for value creation:
- assess the full suite of options for value creation;
- evaluate how strategic options can affect total shareholder return (TSR); and
- understand long-term shareholders' views on value creation.
Directors need to ensure they are presented with the full suite of options so that they understand the sensitivities, risks and options related to each strategic option. Once properly informed, boards are encouraged to collaborate with management to consider bold strategic moves that will promote the long-term interest of shareholders and to adopt an activist's mind-set by scrutinizing a company's capital efficiency. Directors must also appreciate the impact of a company's strategic options on its TSR. This begins with a more thorough understanding of a company's valuation in order to appreciate and challenge management's opinion about the company's valuation in comparison to that of the research-and-investment community. Finally, boards need to ensure that senior management is plugged into its major shareholders. Are they reaching out to major shareholders when an activist attacks or are they conducting routine dialogues with shareholders? Do they understand major shareholders' investment theses for their company, their views of the company's direction and their "buy"/"sell" triggers?
While good scores in governance are an effective deterrent, the best defense against shareholder agitation remains demonstrable performance. By moving beyond governance to enhance focus on a company's most crucial performance metric – its shareholder value creation – the paper suggests the effort will be worth the long-term rewards.
Norton Rose Fulbright Canada LLP
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