Over the last few months, I have posted and commented on a large number of articles about activist investor campaigns on a worldwide basis. The reason I posted these articles is that every single one of them involved a partial replacement of the board. And, in a couple of situations, full board replacement was being sought. Most importantly, in most of these situations, activist board nominees were clearly selected based on their experience and track relevant to certain value creation requirements of the company. These shakeups of the target company’s board was a core component of their investment thesis.
Now, if the function of boards is what the governance world tells you it is, then why would sophisticated activist investors seek not only to replace board members but in most cases replace them with individuals who have experience and track records that are in alignment with specific aspects of the company’s value creation opportunities? Are activists seeking individuals who are more “independent” or that are experts at compliance or that add to diversity without the relevant skill and track record? Would it be more important to an activist investor that an individual had a “director certification” from a leading governance association or that they had a track record of materially increasing delivery system efficiency at a company that has delivery system efficiency improvements as one of it major value creation initiatives? In seeking to ensure that the company was pursuing the full development of its potential would an activist seek a director who had extensive public company board experience but little performance impact track record or would they seek an executive/partner from a top quartile private equity firm who has been in the business of developing the full potential of companies for the last 20 years and has developed a formidable track record in this regard? Is a company better off having a non-executive chairman who is really good at “reaching consensus” or one that has high standards and expectations for the company and leads the board in that context?
So, why do activist investors go about director criteria development and selection differently than governance & nominating committees or what “good governance” best practices advocate? It is because they both understand and have a mindset (intention) for value creation. They are focused on the business and the various avenues for driving the business to a higher level of performance. This understanding and mindset creates the context for every action taken including director nominee criteria because they view the board’s governing objective as value maximization.
With the above approach, activist investors rightly view the board as an asset. And in the case of many public companies it is viewed as an asset that is undervalued and thus underperforming. As such, for many, developing the asset value of the board is the core of the value maximization thesis.