How CFOs can manage activist investors

About three-fourths of US public company CFOs say they have experienced some form of shareholder activism. And the trend is expanding to other parts of the world, research indicates.

Some activists want a company to spin off certain divisions, replace board members, or increase share repurchases. In the past, shareholders who were unhappy with a company’s strategy or leadership would sell their stake. Today, if investors see value in a company but are frustrated by its actions, they can band together and call for changes.

“People are beginning to understand that, as owners, if you come together and make a point, often the boards will be responsive, and you will create value,” said Charles Elson, director of the University of Delaware’s Weinberg Center for Corporate Governance.

Amid growing shareholder demands, CFOs in a Deloitte survey say, companies respond by making changes or planning to make changes related to share buybacks. Others are making changes or considering changes to their boards.

Before those changes are explored, CFOs need to understand how to manage activist investors. Deloitte offers a playbook for finance chiefs to help their companies prepare.

Direct communication with management is the most common type of shareholder activism, experienced by more than 60% of CFOs. Indirect communication, such as using social media, was about half as likely, though it is such public activism that makes headlines.

Deloitte recommends five steps for CFOs to take to help manage activist investors.

  • Articulate the value proposition. Make a clear, fact-based statement about why a company picked one strategy over another.
  • Regularly evaluate strategic and transaction alternatives. This evaluation should be objective, and it should include a prioritisation of alternatives.
  • Review governance policies and board composition. Focus on determining whether performance is aligned with compensation. A lack of alignment or excessive compensation can generate interest from activist shareholders.
  • Get out in front of significant events. Be prepared to communicate how a strategic shift or, for example, an acquisition can deliver long-term shareholder value – before the major event happens.
  • Monitor market activity. Be aware not only of share price but also of recent changes in investor behaviour. Pay attention to your industry and your peers who might be facing pressure from activists.

Once armed with a full spectrum of information, CFOs are in better position to address an activist investor’s demands. Regular, open engagement with investors can “help establish credibility with the investment community that management has the shareholders’ interests at heart,” Deloitte said.

Another way that finance chiefs can play a role in managing activist investors is through collaboration with investor relations. Deloitte writes that the CEO and CFO should work closely with the IR chief so that the chief can be “fluent in company strategy and finance.” That fluency yields better conversations with investors.

Engagement matters

Elson said organisations must take a three-step approach to activist investors: Engage, listen, and react. “If management was doing a good job, the activists wouldn’t show up,” he said. “The activist is the messenger, not the message, and you can’t confuse the two.”

CFOs can help by listening and responding to activist demands. Often, activists simply want a company to re-examine its strategy. “I think any time you’re forced to justify what you’re doing, it’s healthy,” Elson said. “The old strategy is not necessarily the best strategy.”

CFOs are regularly engaging with shareholders, the Deloitte survey showed. More than 90% talk with key shareholders quarterly, and 85% solicit investor feedback quarterly. This sort of proactive conversation is one way to keep shareholders aware of company strategy and to prevent them from becoming activists.

“Engagement is important,” Elson said. “Listen to what they are saying, argue the other side, have a healthy debate. A sophisticated [shareholder] may have a pretty decent perspective. … You have to listen to people who have entrusted their capital with you.”

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Neil Amato ( is a CGMA Magazine senior editor.