Don't work for a hedge fund? Not an investor at all? It doesnt matter, every business leader needs to adopt an 'activist mindset'
Investor activism dipped in 2020 and 2021 as Covid dominated the world agenda. however, early signs are that activity is increasing. Peloton, Amazon, Unilever, Exxon-Mobil, GoDaddy, Kohls and Ericsson have all caught the eyes of activist investors so far in 2022. Whether you’re a blue-chip company or a new economy darling, you’re not immune. With an uncertain political and economic outlook coloured by Covid, Ukraine, inflation, US mid term elections —any misstep is likely to attract activist attention.
For many Chief Financial Officers (CFOs) an activist investor threat can be a significant distraction. Time, resources and focus are diluted. But there is a reason for such assaults: Investors are armed with more information than ever, increasingly advanced analytic models and lots of valid questions for management.
So what’s the best defense against an attack? First, the CFO is the C-Suite executive best armed to blunt an activist attack. CFOs have the motivation, expertise, data and insight to be well ahead of the outside investor. Using tools such as advanced analytics, scenario planning and predictive modeling, CFOs can partner with CEOs to prepare a compelling strategic and financial story to investors. And if the story is less than compelling, then activist investors may be justified in their attacks.
Those CFOs that are best at positioning their companies to win the hearts, minds and wallets of investors are those who combine seven fundamental elements to deliver value to investors.
Focus of the Activist CFO:
Results. The best defense against any activist is results. Are you consistently delivering a total return to shareholders that is at, or near the top, of your competitive peer group? If not watch out, an activist assault may be imminent. Research shows that technology and talent are seen as the most critical elements to executing strategy.
Strategy. Can you demonstrate how your strategy will deliver market leadership and superior returns while handling volatility and uncertainty? Disruption remains the norm in almost all sectors. How resilient is your strategy?
Portfolio. Does your portfolio make sense? Do you have businesses that are diluting performance with little chance of significant improvement? If so, divest them. Are there businesses that are significantly undervalued compared to true value? If so, can you demonstrate the value? If not, spin them off.
Investment. Despite years of re-engineering, best practices and automation, ss much as 70 percent of staff time is still consumed by processes that do not directly add enterprise value. Can you demonstrate that your business is optimized? Do you have the right balance between investing in the core while also rotating to new in terms of innovation and digitalization? Have you zero-based your organization and its spend to ensure that cost, quality and productivity are optimized?
Execution. Can you demonstrate your ability to execute on items 1-4 in a consistent and compelling manner? Do investors have confidence in your ability to execute?
Governance. Does your governance model inspire confidence, promote transparency and align the interests of ALL shareholders, management and other constituencies? Focus on environmental and social practices is adding complexity and cost, but can also increase trust and reputaiton.
Storytelling. Last but by no means least: Can your senior leadership team and especially your CEO and CFO tell a great story that links vison, to strategy, to shareholder outcomes to inspire excitement, confidence, respect, trust and loyalty among all stakeholders?
What is new is for CFOs to adopt an investor or "outside in" mindset.
None of these attributes are new. What is new is for CFOs to adopt an investor or "outside in" mindset. Finance chiefs have been internally focused and backward looking for a long time. However, as digitalization of routine business and finance operations accelerates, CFOs have both the time and the data to adopt a more forward-looking, strategic and investor-centric mindset.
While not guaranteeing immunity from investor attacks, the Activist CFO can leverage increasingly rich data, technology and tools to thwart the attack if unmerited, or address an investor’s concerns in a fact-based and constructive manner if they have merit. Those that fail to meet the challenge face the potential for knee-jerk reactions that could not just be a huge distraction but also damaging to the long-term success of the company.