March 31, 2016
FTI Consulting’s new Corporate Issues Study focuses on six key corporate issues – M&A, Shareholder Activism, IPOs and Spin-Offs, Executive Transitions, Regulatory Changes, and Crises – as seen through the eyes of institutional investors. Part I of the series takes an in-depth look at the role investor confidence plays when it comes to evaluating a variety of corporate issues including Mergers & Acquisitions, IPOs and Spin-Offs, and Shareholder Activism.
This portion of Part I of our series explores how investors react to shareholder activism. Increasingly, management teams are forced to plan for or confront activist threats. Our research indicates that ongoing, open communications and confidence can help immunize a company from being an activist target or put a company in the best possible position for a successful engagement should they be targeted.
FTI Consulting’s research shows that the best defense against activism is strong proactive investor relations. Shareholders echo this sentiment in their view of the most effective means to preemptively stave off being targeted by an activist investor.
Open communications and transparent disclosure are best practices in investor relations and corporate outreach. These practices have the added benefit of immunizing a company’s shareholder base from being receptive to a private approach by an activist, an initial step in many activist campaigns, therefore reducing the likelihood that the activist eventually launches a campaign.
When an activist does enter a company, the perspective and support of other (potentially longer-term) shareholders becomes a key factor in a successful defense. Our research shows that shareholders are most likely to back the activist if management has failed to execute on its financial goals or stated strategy, or has failed to clearly explain its growth and capital allocation strategies.
Shareholder confidence plays an important role in thwarting an activist threat. In fact, our research suggests that investors are more likely to support activist pressure to engage in M&A, spin-off or sell assets, change capital allocation policies or add new board members, when they lack confidence in management.
Given investor views on how companies can successfully manage engagement with an activist, a few key takeaways emerge:
Companies experience a broad variety of events, transactions and issues throughout their lifecycle – all of which can dramatically impact enterprise value. Smartly managing these critical inflection points can be the difference between success and failure in the eyes of investors, customers, the media and the public at large. FTI Consulting Strategic Communications’ Corporate Issues Study was conducted among more than 300 institutional investors worldwide, and takes an in-depth look at these critical issues through the eyes of the investment community.
In a two part online series to be published in installments over the coming months, we’ll take a closer look at key unifying themes that emerge from our Corporate Issues Study, which is based on survey responses regarding M&A, Shareholder Activism, IPOs and Spin offs, CEO Transitions, Crises, and Regulatory Changes.
Throughout the survey, we also investigated the role that investor confidence plays when it comes to evaluating the six issues above. As data from FTI Consulting’s proprietary 2014 Enterprise Value Study demonstrates, confidence is the key to influencing behavior among employees, customers, investors, governmental leaders and the public at large. In fact, our research demonstrates that confidence is the key to driving action among stakeholders – employees to join or stay at a company, customers to buy products and services, investors to purchase and hold stock in the company, and policymakers and citizens to advocate for the company in their communities. The overarching takeaway, which will be borne out in our series: When investors have confidence in a company, that company receives significant breathing room to operate, particularly when faced with a critical event, issue or transaction.
To determine the impact of confidence on the perceptions and behaviors of investors, FTI Consulting developed a split sample survey approach whereby participants were randomly selected for two groups. This was done for each confidence related question. The questions posed to each group were identical with one exception: One group was asked to answer the question about companies they were confident in, the other about companies they were not confident in. Results were then compared and the differences (delta) between the means of both groups were calculated. Statistical analysis was then performed on the data to ensure that the differences were statistically significant at the 95% confidence level.