How Activist Investors Analyze and Target Boards of Directors
Is your board of directors likely to be targeted by activist investors? If so, is an activist likely to seek to expand the board or target specific directors for replacement? If the latter, which specific directors are the most likely targets? In a recent publication summarized in a Harvard Law School blog, Jack “Rusty” O’Kelley III, Managing Director at Russell Reynolds Associates, addresses these questions and more in examining how activist investors analyze and target boards of directors.
According to Mr. O’Kelley’s research, “the earlier a company is in the process of engaging with an activist, the more likely it is that the activist will encourage the board to expand its size by adding activist-backed directors. The longer and more public the process, the more likely it is that the activist will target specific incumbent directors and consider conducting a proxy fight.” As for identifying which specific directors are most at risk, “activists look at a series of ‘filters’ for each director. The record of value creation and relevance of each director’s skill set are critical.” At the same time, even a director “with a great track record of value creation and with highly relevant skills can be targeted if there are publicly available stories that raise questions about that director’s judgment or integrity.” For more on the importance of director integrity, see this article by John Stout in C-Suite.
The key takeaway is that boards should proactively view their board composition through the eyes of an activist investor in order to prepare for and defend against an attack.