Fortifying your board to defend against an activist: it may be advisable to replace directors who are vulnerable to proxy advisor criticism and thus become fair game for activist targeting. Here is what puts a board member in the cross hairs.

AuthorSeiden, Steven A.
PositionCover story

WITH INCREASING FREQUENCY and effectiveness, well-organized activists are engaging in skillfully conceived proxy contests to replace incumbent directors with those they deem more capable of enhancing shareholder value. How can a board that becomes, or could become, a target defend itself?

The answer is: Think like an activist!

Sound odd? Despite having been stereotyped as quick buck raiders, most activists today actually share the same objective as the companies they've targeted: increasing and sustaining maximum share price.

If, as the saying goes, the best defense is a good offense, then directors need to consider how they would behave if they were activists scrutinizing their own company.

Today's activists, having analyzed a target company in depth, often prescribe a new strategy worthy of serious consideration. Then why hasn't the current board and/or management preemptively performed its own analysis and communicated that to shareholders? Perhaps the board is populated with directors who lack initiative and are comfortable preserving the status quo rather than challenging it. If so, the activist may seek fresh board talent and/or company leadership.

First step

If your company seems vulnerable, the first step should be to appraise earnestly the nature of the board. Is it composed of cronies who go along to get along, or is there real leadership? Do directors speak up and question the direction the company is headed?

A board, notwithstanding the pedigree of its members, needs to be proactive long before an activist approaches. Directors must continually assess the validity of the company's business plan and be equipped to work with management in formulating strategies to achieve greater shareholder value. This may require strengthening or even reconstituting your board.

It would be advisable to replace directors of whom proxy advisors might be critical and thus become fair game for activists. Which such directors will be in an activist's cross hairs?

For one, those who lack total independence. The "friends and family" syndrome becomes particularly pervasive when a founder or controlling shareholder is also the chairman and/or CEO. All too frequently such directors are quite dependent. Also vulnerable are very long termers. Through years of camaraderie they can become compromised and march in lockstep with the CEO. Over time they find it increasingly embarrassing to challenge management.

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