There aren’t that many people in business who need to worry about an activist investor.
These are hedge-fund shareholders who take a small position in a stock and then agitate for change, seeking board seats or pushing for transactions like dumping the real estate. Some officers of public companies and their lawyers should pay attention to these folks, of course, and maybe a few particularly conscientious board members. That’s about it.
Yet the best idea for dealing with this kind of hedge-fund shareholder seems too valuable to not share with the managers of just about any business, an idea so simple no one will even have to write it down to remember.
Be your own activist.
That is, look at your business like a critical outside partner would, find the things they could credibly complain about and then fix them.
This idea came from Tony Brausen, who had last worked as a corporate officer at the Mosaic Co. He also had been CFO of Tennant Co. and has served as an independent board member.
He has spent a lot of time thinking about the problem of activists and has shared his insights as a lecturer at the University of St. Thomas business school and in front of an audience of corporate board members.
The way to keep activist shareholders away, he said when we met recently, is to not give them any reason to come knocking in the first place.
It seemed obvious right away that this notion could work at a privately held company, too, even a family-held company. Just look at the business as an outsider would, a deeply critical outsider. Even better, get some help from an adviser when taking that close look.
“Be proactive and honest about it,” Brausen said, including eventually sharing any plans to shore up weaknesses with shareholders and other people who would want to know.
Activist investors generally have no special strategic insights about a business, and as hedge-fund managers there’s no reason to expect they should. But they can easily spot a poor use of capital, so it’s no surprise that at the top of Brausen’s list of what to look for is what he called a “lazy balance sheet.”
He didn’t come up with this term, but it still seems to be a fresh way to characterize one of the main tasks of management, and that’s how to best spend the company’s money.
A balance sheet is just the accounting snapshot of everything a company owns on one side along with what’s owed, including what’s owed to the owners of the business, on the opposite side.
Lazy just means the assets aren’t producing enough value or the financing costs more than it should.
An activist will comb through the assets to find things that aren’t very productive, at least compared to the cost of the money that’s financing them, and then insist on getting rid of them. So that’s what management should do.
Brausen did not mention this, but the best example might be holding too much cash, invested in short-term investments that likely yield close to zero.
Problems could lie on the other side of the balance sheet, too, primarily using capital that costs too much.
Debt is simply cheaper than shareholders’ equity, the owners’ investment. This seems to be a hard-to-grasp idea for a lot of business owners, who know banks charge a lot of money for interest on borrowed money that wouldn’t be necessary if the owners funded the business instead.
Yet equity easily costs double-digit rates per year. Think about it: What kind of annual return would it take for an investor to accept the risk of ownership and then keep that money in the business? There’s just no rate for cost of equity to look up in the newspaper, so its cost might not be obvious.
The right thing here is to strike a balance, of course. That’s true for publicly held companies as well as family-held ones. Turning any company into a junk-rated borrower isn’t a great idea.
Another problem is a messy portfolio of businesses, like hanging onto one that senior managers really don’t understand. It might be a business that shareholders don’t value very much, either, and then the valuation of the whole company will be penalized.
Losing control of costs is another item on Brausen’s list, particularly compared with competitors that operate more efficiently.
Big companies have access to consultants and investment bankers to help with this deep dive, including presenting results to the board of directors. The strategic planning process needs to include the actions that need to be taken — after discussions with the board.
Small-company owners, on the other hand, likely won’t want to pay for consultants and won’t have any big fees to promise investment bankers. Yet the same process can work for them, maybe by relying on an advisory board for help. As for adviser qualifications, the main one might be just a willingness to speak bluntly.
The controlling owners of a small company aren’t likely to get voted off their own board, of course. But that doesn’t mean they don’t waste capital or stubbornly hang on to unproductive assets.
Brausen said his wisdom didn’t come the hard way, from his own hand-to-hand combat with activists, and declined to discuss specific experiences from his own work. If Mosaic had been visited by an activist investor, for example, the situation seems to have never made the news.
He did serve on the board of Imation Corp., then based in Oakdale. Brausen resigned from this board just after the New York investment manager Clinton Group Inc. grabbed control in the 2015 proxy season.
Brausen declined to directly discuss Imation other than pointing out that his “be your own activist” approach might not have been all that applicable to Imation back then anyway.
That story didn’t end well, incidentally, at least for Imation employees and shareholders, a conclusion easily formed from skimming its regulatory filings. The company exists under a new name but with no revenue through the first nine months of last year and a stock value that has fallen down an empty elevator shaft.
One of the mistakes the Clinton Group seems to have made here was letting someone like Brausen leave this board.