The Role of the Board in Turbulent Times: Avoiding Shareholder Activism

Abstract

The paper is the fourth in The Conference Board series of reports on the oversight role of the board of directors in the current economic crisis. It provides board members with a checklist of issues they should consider addressing in their relations with shareholders and, in particular, how to avoid a costly and disruptive battle with an activist investor.

With corporate valuation declining and an economic and political environment favorable to change, the 2009 proxy season is witnessing a new wave of investor demands. In particular, due to the liquidity problems facing many corporations, there is a clear shift from the financial-oriented activism campaign aiming at cash extractions to new initiatives pursuing strategic, operational, and governance-related corrections.

The economic downturn has created extraordinary upheavals across global markets and severely penalized stock prices: Today, financial markets supply a number of undervalued companies and investment opportunities, as many businesses maintain relatively strong balance sheets and healthy long-term earnings potentials. The paper argues that it is in the interest of corporate boards to act proactively, understand shareholder intentions, and correct vulnerabilities so as to avoid becoming the target of activists. It also offers practical suggestions on how to design an action plan and respond to negative publicity campaigns mounted by disgruntled investors. Several current examples as well as a detailed table of cases from the 2009 proxy season are included.