In collaboration with The Boston Consulting Group and RBC
Capital Markets, our Canadian Special Situations Team has released
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
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
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
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.
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