THINK LIKE AN ACTIVIST: Success in the age of shareholder activism means knowing how activists operate, and perhaps welcoming them onto your board.

• Author: Essenmacher, Erin

According to Korn Ferry, last year, activist investors launched 929 campaigns worldwide, a 6% year-over-year increase. In the United States, activist campaigns sought to change board composition and focused on specific corporate governance concerns like board tenure, executive compensation, shareholder rights and ESG-related risk. Shareholder activism is expected to rise, driven in part by the SEC's new universal proxy rule, which enables investors to target individual directors for removal.

Although traditional asset managers and hedge funds account for most activist activity, advocacy organizations also use the tools of shareholder activism, most notably shareholder proposals, to encourage companies to change. Investor coalitions formed with a focus on specific issues, such as climate or corporate social responsibility, are also growing in size and influence. While it may take different forms, the goal of all shareholder activism is the same: to push management and boards to change some facet of the way their companies are run.

BOTH RISK AND OPPORTUNITY

Many directors view shareholder activism as a risk to be managed, but it also presents a strategic opportunity if addressed proactively, says Michael Montelongo, former assistant secretary of the Air Force and director of Conduent Inc. and Civeo Corporation.

"Shareholder pressure can serve as a valuable wake-up call for companies that are underperforming --if it isn't ignored," says Montelongo. "It can work well if an activist is motivated to work with a management team and board to address serious strategic, operational and financial challenges, and if management and boards leverage the benefits and insights activists can provide. Activist investors may have sound ideas about how management can use the company's assets better, improve its operations or enhance shareholder value."

Patrick A. Cozza, executive in residence at Fairleigh Dickinson University's Silberman College of Business and a director of Franchise Group Inc., agrees. "Activism overall has more of a negative connotation to it, but [activists] can play a valuable role when they come in truly looking to help the management team and the board turn the company around. If you have a company that's undervalued in some way, shape or form because of either a flaw in strategy or an issue with the leadership team, or potentially with the board, an activist can bring new thinking and disrupt the culture positively.'"

Andrew Shapiro is founder and CEO of Lawndale Capital Management, which manages the longest-running activist fund in the small and microcap space. He says a healthy boardroom culture is one in which the board is empowered with the right information to push back on management when necessary, and that lack of empowerment is one of the biggest signs that a more activist posture should be assumed.

"A big red flag for me is when I ask a question that relates to the board's purview, and I'm referred to the CEO, or I hear of management promulgating, whether it's through a few really close cronies or directly, limitations on the board from availing themselves of what I view as an essential component of the duty of due care, and that is the duty to be informed," says Shapiro. "When undue restrictions are placed...