European Audit Committee Leadership Network, April 2020
The rise of shareholder activism has caught the attention of boards across Europe. Companies that once viewed themselves as protected from activism based on factors including size, shareholder base, or governance structure are no longer immune. In many cases, activists launch campaigns built on sophisticated financial analysis of a company—and offer critiques about management and governance that ring true with other investors.
On 21 February 2020, members of the European Audit Committee Leadership Network (EACLN) met in Amsterdam to discuss how European companies respond to shareholder activism. They were joined by Richard Thomas, the leader of Lazard’s European shareholder advisory practice.
EACLN members and their guest explored the following three topics:
The state of shareholder activism in Europe
Shareholder activism is on the rise in Europe. Activist funds have adopted a more aggressive, demanding, and public style of activism. These investors are intervening at companies with compelling stories about ways to improve their governance and their financial performance. Moreover, these campaigns are more likely than ever to receive support from both active and passive fund managers, each of whom seek to unlock value in their portfolio companies.
Preparing for potential activist campaigns
Companies are doing more to assess themselves with a critical eye and to proactively address the vulnerabilities they uncover. One often-overlooked aspect of this assessment is an analysis of the company’s governance to identify perceived weaknesses in the board’s skills. Engagement with institutional investors—especially before any activist intervention—can help a company establish more meaningful relationships and obtain valuable new perspectives. Companies can also develop a crisis-response plan in which company leaders understand the role they will play from the minute an activist arrives.
Responding to an activist intervention
Speed is essential to a successful response to an activist intervention. One way for boards to make faster decisions is to form an ad hoc or special committee to oversee the company’s response. The right negotiation posture depends on many factors. Setting the terms of information flow and confidentiality lend predictability to the discussion while protecting the company’s interests. Written settlement agreements help companies gain clarity about the role the activist will play going forward.