Fasken
Welcome, Mike.
Verrechia
Thank you, Mark.
Fasken
Mike. Today we're gonna be talking about managing activism and the quote, “failing to plan is planning to fail" came to mind as we were planning. It seems as though a huge part of activism preparedness is having a well thought out plan. So we're looking forward to hearing some of the tips and best practices that you have to share.
Verrechia
Thanks for having us, Mark. I'm looking forward to it.
Fasken
Alright, so we're gonna get into our first question. The first one we have here is, if you could start by telling us a little bit more about some of the services that your firm provides around activism and some of the ways that you help corporates.
Verrechia
Great, well, Morrow Sodali is a firm we've been in business 50 years, we have, you know, core services around strategic consulting, in connection with shareholder engagement, activism, defense and preparedness, ESG consulting, capital markets, intelligence and proxy solicitation, we have about 600+ clients that we work with in this capacity across the globe, we have offices in every major market, and we have people on the ground in those markets that speak the language. And that's really a bonus to, you know, most of our clients, as you know, they have holders that are non us all over the place, that we can really interact with them efficiently. So, you know, as we talk about activism, and some of the services we provide, you know, our preparedness program really centers around some critical areas of focus.
First, we work with companies to establish a comprehensive shareholder profile analysis. So what companies see, when they look, you know, when they work with their IR teams, and they're engaging with shareholders they tend to see shareholdings that are stale as soon as they're filed. So our firm comes forward, and we look at that shareholder profile from a voting control perspective. So our goal is to look at your last filing, get a sense of who owns what. And then after looking at that, we're looking at what did those institutional holders have to vote? And then ultimately, how are they influenced, you know, by whom? And ultimately, how do they make a voting decision. So in doing that, you know, we establish a shareholder profile, we also provide a strategic stock surveillance.
So once we establish that profile, we want to continue to monitor that profile weekly. As we look at trading, we look at movement among bank and broker custodians and understand which of your top holders may be buying, which may be selling? And are there any red flags in the trading activity? That could lead us to believe that, you know, maybe there's an activist investor who's taking a position or more than one, you know, maybe there's a Wolfpack of investors that are taking positions.
Once we're doing that, we've established that profile, we then look at using that information, right to create a foundation for your campaign, we provide voting scenarios based on multiple different, you know, voting outcomes. And ultimately, what we're looking to give to our clients is a snapshot of how would you defend yourself if a proxy contest were to surface today, with the profile that you currently have? You know, what would be where would be the key areas to define success in that type of campaign? And you'd be surprised how many companies don't really focus on that. And so therefore, when someone surfaces, they're working with information that's stale.
So you know, again, I believe that's a foundation that you have to have, in order to get the best advice around what you should do. Should you be fighting the proxy fight? Should you be settling the proxy fight? So again, our activism preparedness services really kind of focused around understanding your profile, tracking your profile? And using that information? To give you a realistic sense of what to expect if you're faced with something like this?
Fasken
That's awesome. Okay, thanks. So you touched on a little bit of it there in sort of the surveillance and just trying to understand shareholder base in general, but what should IR teams be on the lookout for if they think that they have an activist or as you said, a Wolfpack in the stock?
Verrechia
Yeah. So, you know, that's a great question. Because I think, you know, how do companies determine that without the activist surfacing? Like, you know, if an activist wants to be discreet, they want to play below the radar, they do. Oftentimes, the first time, you know, you have someone is accumulating a position is when they surface when they call you, right, so, so I think, I think having an IR team that's fully engaged, that, you know, work with firms like ours, to, you know, in IR firms to understand who the holders are when they call in, right, you know, we, we always say that you're in a proxy fight. From the very minute an activist calls you on the phone or emails you whether they're going to run a fight or not, every communication and everything that you do with them, everything you say to them becomes part of the record in the background of the solicitation. So just having an IR team that's aware, you know, of who the players are in the space, or that they have a firm like ours to bounce those things off of As a first line of defense, you know, I got a call from Carl Icahn, who was he? Well, we have a lot to talk about, right. But sometimes it's the first time activist or some new player in the arena that, you know, they could call in, and you may not even have a clue of who they are, what their history is, what their intentions are. And you're working to do what your job is, which is, you know, engaged with that shareholder. And I think you might approach it differently if you know who these people are, and what their intentions are.
Fasken
So what about in an instance, where, you know, an activist is in the stock, but they don't necessarily, they haven't surfaced yet, as you put it. So let's say whether they come in surveillance, or they've been promoted, like a 13F filing or something, and maybe they're not, you know, a very active activist, but it's come up, what's the first thing that you would suggest an IR team does in that instance? Is it to reach out and have a conversation? Or what do you recommend?
Verrechia
Well so I think So, you know, again, it depends on what the intentions are of the activist, if they want to make it known that they own a position they're filing it becomes a public situation, if they're looking to really work constructively behind the scenes, they're communicating, you know, through the IR team, or through the executive management team, or sometimes even to the board directly if they think they can get access there. And so, you know, as far as the first thing to do, I mean, if somebody is surfacing, and you had no idea that they were a shareholder, and you're not doing some sort of surveillance program, that's the first thing is to really assess the damage, assess what their holdings might be, you know, are we talking with someone that has, you know, a very small piece of your stock? Or is this someone that has 2%, and we're in, we're seeing evidence that they're buying more, you know, activists often try to stay below that 5% threshold so that they don't have to file a 13 D. And so, you know, you may not see them until they decide to reach out to you unless you're using a surveillance program and a strategic surveillance program at that. That's specifically looking for any red flags in the trading activity. So I would say that if you're not doing those types of things, and you hear from someone that's an activist, you want to put that program into play right away.
Fasken
Yeah. Okay. And if an activist hasn't maybe reached out, and you're aware, say even through a surveillance program, would you recommend that that an IR team or company reaches out to that activist to understand sort of what their intentions are?
Verrechia
I think everything is sort of a unique situation, right? I've been involved in situations where we are actively tracking stock, and we are seeing evidence of an accumulation that raises a concern for us. That alone doesn't tell you whether it's Starboard or Elliott, sometimes you can get, you know, some indication on who's there. But that alone isn't something that says, “Okay, you're gonna go call, you know, this person right now”, I think the truth is just, you know, having that intelligence makes you smarter for when that person does surface, if they surface. And when they do, you'll have a plan in place for how to engage properly, you know,
- What has the history has been?
- What have these people done in the past?
- What other concerns have they had at other companies?
- What are their old other campaigns look like?
So those are the types of things that you want to build upon. When you realize that someone's out there, you want to understand a comprehensive history of who they are what they do. That doesn't mean you want to call them right away and get the ball rolling. Because, you know, listen, not every activist, you know, they don't run campaigns everywhere that they own stock, right, they sometimes move on, and hopefully, they will.
Fasken
So it's kind of a it's a starting point, you're planning to start the plan, start planning, start thinking about what the next steps are, if they are to surface and you're engaged in a contest. Okay, that's great. And so that sort of segues into our next question, which is, I was reading an article the other day, basically stating that a company having a plan can deter activists. They almost like the act of having a plan can help. Do you think that's true?
Verrechia
Yeah, it's interesting. It's an interesting comment. I would say that, I think it could be true, but really only in very unique circumstances. You know, having a plan in place is not going to stop. Carl Icahn, or Starboard or Elliott or you know, one of these activists that have access to unlimited resources. They've already done their homework on your company, they believe there's a way to unlock shareholder value. And you simply having a plan in place isn't going to necessarily deter them. You know. So I think it could be true in very unique circumstances. But I would probably say that, you know, in most cases, you know, when these folks are arriving at your doorstep, they're coming with a plan in place to, you know, to kind of get what they want. Right. And so, you know, they know that the biggest companies in the world have, you know, top advisors across every, you know, area that they need to be covered. And so I just think that it would be a very unique circumstance for that to be true.
Fasken
Okay, what percentage of companies that you speak to have a plan in place?
Verrechia
That's a great question. And that's something I talk about a lot, I would say that, you know, most companies that I ended up having to talk to believe that they had a plan in place. But is it the best plan in place? And I think the answer is no, I mean, I would say that many companies, when they think about activism, they're looking at activism that has occurred within their own industry, right, for the most part, they're looking at who the players have been, and then in their, you know, in their building sort of a plan, like an emergency plan, you know, in case of emergency break the glass, I know, I have a law firm, to defend me, I know, I have an IR firm or PR firm, I know, I have an investment bank that I'm working with. And then you have a firm like ours that deal with shareholder engagement, and, you know, surveillance and solicitation. And many companies that I've, most companies that I work with have identified you know, who those players are going to be. But that by itself is not really a preparedness plan. And I think, you know, having a more comprehensive look at their profile, like we just talked about, is really what a preparedness plan should, should entail. And even if you don't listen, if even if an activist never knocks on your doorstep, right, having that information just makes you more intelligent, it's, it can be difficult to have to work backwards from when the activist surfaces to build all that intelligence over time, you know, I always say was surveillance, you know, the information is better, the longer you're looking at it, you tend to see the ebb and flow of stock movement. If you have, you know, index fund heavy at the top of your profile, you'll see the stock loan kind of coming in and out. So, you know, you're just in a better place for having done that work. And if an activist surfaces, you know, at that point, you're, I feel like you're you're very well prepared, as opposed to having to work backwards against the clock.
Fasken
Right? So you sort of covered a little bit of this in here. What tips would you give to an IRO, who is maybe starting to put together a plan, because I feel like maybe some of the people you talk to, they have a plan, because something has happened to them in the past? That it's top of mind. Right? Like a lot, not all companies operate that way. So there are for sure, a lot that are just starting out on this journey for whatever reason, what tips would you have for them?
Verrechia
Yes, that's a good, that's also a good question. I think that it's, you know, again, understanding, you know, your, your shareholder profile, and who your, who your advisors are going to be is really the first step. But what I would also say is, you know, have a group of people internally, right? Like, I've worked with companies, where the IR and the legal are on different sides of the house, they don't communicate as effectively as they could. Whenever you have a team in place, where internally, you're all on the same page, and you're all moving, you know, in one direction. That's an important part of all this to, you know, having that communication, and not really falling into any traps of doing things over and over again, just because that's what you've already done. That's another thing that I tell companies, you know, I think you're right, that I get involved with companies when there is a problem, or they think there's a problem. But I would say probably more so over the last, you know, handful of years, companies without any direct threat of activism are reaching out to me and saying, what should we be thinking about? Right, and that's a I think that's a sign of companies getting smarter about not wanting to be flat footed, if an activist surfaces. And I think that's really an important part of all of preparing for anything right is making sure you're doing it early.
Fasken
Yeah, well, that's why we were talking about that quote, because it's this whole idea of failing to plan is planning to fail. And that's exactly I think, what the purpose and focus of this episode is really on is being proactive. And so it sounds like some of the three most important things you would say to get down early is, I think that's great on the internal team, like who is that? Little team that we're all going to rely on and interact with, sort of the list of advisors that you engage in that shareholder analysis is a big piece of it as well. Awesome. Okay. On to our next question. So if a company has identified or believes that there's an activist in the stock, what should they avoid doing at all costs?
Verrechia
Yeah, I think they should avoid just trying to take it one on one, right. So so I've been involved in social situations where there's, you know, an IR person who, you know, gets an inbound call, and, you know, believes that they can kind of handle this, you know, without really talking to anyone else, or really doesn't even understand the situation enough to know that they shouldn't be doing it. That's part of it, like being educated on that, I, this will go back. I've been doing this for 25 years, this goes back, probably 15 or 20 years, but I once had a client who came forth and an IR person who came forward and said, “you know, they were asking me questions about the cost of mailing the proxy material to their shareholders”. And I talked about this a lot. And so, you know, that's a pretty common question. When you work with companies around an annual meeting, we answered the question for them. And then they came back and said, “Well, what if, you know, what if you had to mail to every account”, and well it costs more to do that, and then finally said, but why are you asking? And you know, in the IR person said, “Well, you know, I got a call the other day from Carl Icahn”, and this is a true story. And she said, “You know, we've we, you know, he was threatening to mail to our shareholders and run a proxy fight for board seats. And we figured once you realize how many holders we had, and what that cost, that you probably wouldn't think that was a great idea.” And that was the first sign. And so again, you know, not having the wherewithal to understand what's in front of you is a big is a big thing that you need to you know, you need to avoid trying to handle it on your on your own, you know, you need to raise these things up the flagpole right away. I think that's a very extreme circumstance, of course, I think probably these days, more internal IR teams are very well aware of what can happen and who the major players are. So, you know, it's not likely. But you know, you never know, like I said, there are, especially in the last couple of years, there's been a lot of, you know, first time activists, or activists who ran campaigns at smaller companies, and then they're targeting larger companies. And so, you may, you may think that they don't have, you know, the resource to run an effective campaign. And, and I think that's, that's simply not true, you know, you're seeing more and more holders running campaigns for the first time and their targets aren't necessarily small companies.
Fasken
Yeah, so it's having that education, not handling yourself. And I think it's also having access to that information in some way, whether it's through an advisor or data platform of some kind, where you can look some of these people up and try to understand a little bit more about them before you engage in treaty play.
Verrechia
Firms like ours are working more as a supplement to IR, we work with IR teams, and we work with them effectively. Right? That's the focus, it’s to be like that line of defense. So you know: who's listening to your earnings calls, who's requesting meetings, who wants to meet you at conferences, what are they saying; we want to understand those things, and you know, and again, all of that kind of goes into what we would consider your vulnerability to a campaign. So I think there's just more focus on education. And like I said, I think the key thing is, don't try to go it alone.
Fasken
On the flip side, can you recall an example of a client handling a proxy contests are well on their own?
Verrechia
The short answer to that is no. You know again, having done this for a very long time, I can't tell you how many times we hear from the CEO of the company that we're talking to you that, you know, they're not concerned about a shareholder vote, you know, "the shareholder base loves me, they, you know, they're gonna vote with us, I can deliver 60% of the outstanding shares, and the activist doesn't have a leg to stand on"... And never have I heard someone say that, and then actually deliver on that, and again, if they, if they were to do so it would have to be at a extremely small company without a lot of institutional holders, and they would have to have a lot of relationships with individual shareholders to kind of get you there.
So I think it's very extreme situations where a company can really go out and do this on their own. And I really don't think they should, I mean, I think it's, I think it's pretty irresponsible to shareholders to take that approach that you could just deal with, on your own, you know, you want to make sure that every decision that you make, in dealing with an activist is based on information, you know, intelligence, that's, that's, you know, accurate. And so, you know, just just looking at your profile and trying to understand, like how they're going to win a fight on their own. They don't have all the information and they don't know how to get to it. You know, that's the other thing. That's why firms like ours and others will look at your shareholder base and give you a sense that, you know, you may think you're going to win this, but when unless you win certain pieces of this vote, you have no chance and so so again, you're you're basically trying to do something without having, you know, the right foundation for what the campaign should be.
Fasken
Yeah, hope is not a strategy I use. Exactly, exactly. We're going down at sort of a bit of a negative path of questions here, but I think it's good. This is how we all learn. Can you recall an example of a client doing absolutely everything wrong before bringing you on?
Verrechia
So yeah, I don't know about everything wrong, but there's certainly a lot wrong, right, I can think of, I can think of situations where, companies go down a long path of engaging with an activist without really understanding how to, or if they even have, not even really knowing what they own, you know, kind of going on the activist word on what they own and that type of thing. So,,I can say that I've had situations where, you know, the CEO agrees to meet with an activist one on one. And it turns into a, he-said-she-said type of thing, and what happens in those meetings. And so those situations are tough to come back from right. Any wrong move that you make, can cast doubt upon the shareholder base, you know, and so you have to remember, everything that you do with an activist, every conversation you have with an activist goes into the background of the solicitation if you're actually in a proxy fight.
And when you get in front of the institutional advisory firms like ISS and Glass Lewis, or you're talking to your top institutional holders, whether it's the Vanguards or the BlackRocks of the world, everybody always wants to know what happened that got you to the situation that you're in, you know, and so all of this, all of these things that you do, becomes public knowledge, for the most part. And if you're doing those things without the advice of people who have done this before, you can really dig a hole for yourself in that context.
So, so and again, I can't think of an example where they've done absolutely everything wrong. But I've certainly been involved in situations where the companies have done a number of things wrong, and then you do have to try to work your way out of that, you know, you have to explain yourself, you have more explaining to do. I think, how do you rectify those situations was something you'd asked me earlier today. And, and I think it's really just about putting your telling a proper story and getting the right story in front of your shareholder base and letting them make an educated decision on all the facts, you know, all the information that's out there. So it can be an uphill battle. Yeah, for sure.
Fasken
Okay. Awesome. Coming up on our last question. So I wanted to summarize a few points that were made here, I think a couple of things that you shared in terms of, you know, best practices and things that fire teams should be doing.
The first one is:
- understanding your shareholder base at a deep level.
The other one he talked about was:
- creating an internal team for responding to activists.
I think that's a great one, especially as you talk about the next point, which is:
Right? Don't try and go it alone. It's a good point that you made, it's irresponsible.
And one of the other things that you mentioned was:
- making sure that you've identified that list of [internal] advisors,
Right, you're not ideally going out and trying to find those advisors after the fact. Once an activist has surfaced, you've already started to build some of those relationships.
So those are some of the key points that we that we touched on, but I have I have one last one, which is one final tip that you would give IROs who want to build a better activist preparedness strategy?
Verrechia
I think it's just one of these things that, you know, it's true for almost every company, is just build a very robust shareholder engagement strategy, even if you think that, you know, it's not necessary, right? I can't tell you how many companies that by the time I end up talking to them, you realize that there is just no, you know, they've had little communication with your institutional shareholders, and even your retail shareholders, like Don't ignore your retail shareholders either, right? So it's about having a good engagement strategy across all shareholder constituencies. You don't want to go to your shareholders for the very first time, when they're faced with the decision to vote for either your nominees or an activist nominees, you really want to build, you know, rapport with them over time, and understand what's important them, not just talking them but actually listening to what they're saying, understanding what their issues are, and addressing them where you can. Right so all of those are things that go into an A good engagement program, and then and then companies do tend to ignore the retail population. Over the years, you know, companies have done quite a bit to ignore that population because you don't get the best To vote returned from them.
But you know, again, looking at your profile, you need to understand that these are people who made an investment in your company because they believe they want to believe in the investment. They believe in your company. And they don't want to feel, you know, out of the loop on these things. So just really working across the institutional retail components to understand who they are and what's important to them, and actually listening to what they have to say and, and looking to address issues where you can I think that's probably the one tip I would say for any IR group. You know, just really, you know, engage for real.
Fasken
Yeah, that's great. Big focus on being proactive in this episode. Mike, really appreciate the time, lots of helpful insights and tips. Thanks again for coming on the podcast.
