Investor Relations, Activism, and Engagement

Activist investors once limited their targets to mostly smaller, less known firms. Now, though, they increasingly target large, household names like Procter & Gamble, DuPont, and Berkshire Hathaway, aiming to influence company actions, replace management, or even purchase the company.

This increase in activism has been facilitated by changes that increase activist shareholders’ ability to exert influence and shape the views of other shareholders.[1] The resulting struggle between managers and activists to influence shareholder opinion about the firm has led to calls for more engagement between managers and investors. For example, in a letter to CEOs, BlackRock CEO Larry Fink emphasized that a “central reason for the rise of activism—and wasteful proxy fights—is that companies have not been explicit enough about their long-term strategies.” Engaging in dialogue with investors and building trust provides companies with a preventive (rather than reactive) defense against activism, as highlighted by Ernst & Young in a summary of conversations with 50 institutional investors, investor associations, and advisors about governance and activism:

When companies engage with long-term institutional investors…those same investors are better positioned to support the company in an activist situation…More companies are realizing that when company and long-term shareholder views are aligned, those shareholders can be a tremendous ally for the company in an activist situation, including actively reaching out to other shareholders to argue in support of management’s position.

There has, however, been a lack of broad empirical evidence exploring  this topic.

In a recent paper, “Investor Relations, Engagement and Shareholder Activism,” we study how the appointment of an investor relations officer (IRO) is associated with the likelihood and extent of activism.[2] Creating an investor relations (IR) function is a publicly observable (and costly) commitment to investor engagement, since its primary purpose is to regularly engage in dialogue with investors to help them better understand the firm and its prospects. These interactions can better align the interests of investors and  management and mitigate the likelihood and severity of activist campaigns. As Deloitte notes, “efforts to address shareholder activism are most productive when they are viewed and conducted in the context of a robust IR engagement program, usually found within the company’s investor relations department”.

Our empirical analyses indicate that IR engagement is associated with increased investor confidence in management and the board (as measured by approval rates on shareholder votes for board members), as well as a lower likelihood of activism. Specifically, the appointment of an IRO is associated with a 20-40 percent lower likelihood of a tender offer and a 10-20 percent lower likelihood of a 13-D filing (indicating at least 5 percent ownership and an intent to influence management), yet no difference in the likelihood of a 13-G filing (indicating at least 5 percent ownership without the intent to influence management).

This deterrent effect becomes stronger when there are fewer impediments to the development of mutual understanding and trust with investors. In particular, we find that the mitigating effect of IR on activism increases with the tenure of the IRO, which provides evidence that dedicated IR rather than  another distinct, but related, factor contributes to the lower likelihood of activism.

We also find that, when firms are targets of an activist campaign, those with IR engagement go through less costly and contentious campaigns, and have a lower likelihood of changing CEOs, than those without such engagement. Specifically, the appointment of an IRO is associated with an 8 percent lower likelihood of a contentious escalation of an activist campaign and a 32 percent lower likelihood of CEO turnover in the year following the campaign.

Overall, our findings suggest that direct and ongoing IR engagement is an important factor in achieving mutual understanding and trust between the firm and its shareholders, which deters activist investors and mitigates the costly escalation of activist campaigns.

ENDNOTES

[1] In particular, activist influence has expanded due to (i) recent shareholder-friendly rules that increase proxy access, (ii) emerging information and communication technologies that allow activists to quickly and broadly reach other investors and launch initiatives, and  (iii) more concentrated institutional investor ownership, which allows investors to communicate and coordinate with each other more effectively.

[2] There is a longstanding debate about the role of activists in capital markets, including their net effects on firm performance; however, there is little debate about whether executives and directors would welcome activist involvement at their firm. For example, in a 2016 NYSE survey of 300 directors of public companies, 80 percent indicated that they would not welcome activist involvement with their board. The focus of our paper is on whether IR engagement mitigates activism, regardless of its net benefit.

This post comes to us from professors Kimball Chapman at Washington University in St. Louis’ John M. Olin Business School, Gregory S. Miller at the University of Michigan’s Stephen M. Ross School of Business, Jed Neilson at Pennsylvania State University, and Hal D. White at the University of Notre Dame. It is based on their recent paper, “Investor Relations, Engagement, and Shareholder Activism,” available here.

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