Major shareholders sometimes bypass IR and speak directly to directors.
As 2007 began, Take-Two Interactive Software faced years of restated financials, a stock options backdating scandal with a criminal investigation, and losses bad enough for investors like OppenheimerFunds and hedge funds DE Shaw and Sac Capital to demand a new board and senior management. By April, these investors had their way.
‘Usually you expect the hedge funds to engage in the really tough activism,’ says Shirley Westcott, managing director of policy at Proxy Governance. In Take-Two’s case, however, even mutual and pension funds were no longer willing to go quietly into that red ink. These days increasing numbers of institutional investors are willing to build coalitions with each other to force change, and this trend will increasingly put Iros in the hot seat.
It’s not hard to imagine the pressures on Take-Two’s New York-based IR department. Todd Fromer, managing partner and head of the IR practice at Kcsa Worldwide, once spent two months dealing with a major investor who wanted a Ceo’s ouster. ‘It’s a very tricky place for Iros to be,’ Fromer says. ‘They’re loyal to the company and they’re concerned new management and a new board will cost them their job.’
The temptation is to cater to their future bosses even while their legal duty is to the company. ‘Until there’s a change of control at the board, they’re directed by the board,’ says Paul Murphy, managing partner of Santa Monica-based law firm Murphy Rosen & Cohen.
Not all problems are as black and white as Take-Two’s, however. Syntel is a Troy, Michigan IT services provider with about 70 percent of its work done in India. ‘We’re a US-based company that has migrated into this global IT services model, so our growth rate has lagged behind that of some of our peer offshore competitors,’ explains Jonathan James, vice president of global marketing and IR at Syntel. ‘There’s been much explaining of our marketing and investment performance to the investor community. That can get fairly contentious.’
Iros and activists
If the company is moving in a direction investors oppose, Iros may legitimately think management is on the right track and try to win investors over. On the other hand, they might think the investors are right and work to communicate that view to management. If management insists on an action with which an Iro disagrees, the Iro may have to support something he or she thinks is wrong – or resign.
To help stave off such pressure, an Iro sometimes just has to concentrate on being a two-way conduit of information between management and investors, not a filter. At the same time, Fromer says, ‘if you’re going to make business decisions without understanding investor perceptions, you’re doomed never to have a healthy relationship with shareholders.’
Often the Iro is forced to go through management to reach the board, while big shareholders bypass the whole process and speak to directors. ‘It really puts the Iro at a huge disadvantage,’ Fromer notes.
Building a connection to investors is also easier said than done because few Iros ‘take the steps up front to prepare themselves for what a lot of these activist firms are going to do,’ explains Don Duffy, president of Integrated Corporate Relations, a US consultancy with offices on the east and west coasts. That means understanding any given shareholder’s history of activism and knowing how invested it is in the company at any given time.
No room for mistakes
Such preparation can make all the difference. Duffy points to the experiences of McDonald’s and Wendy’s. Pershing Square had positions in both and demanded changes, but McDonald’s successfully challenged some of the firm’s assumptions and met with major investors. Wendy’s didn’t mount an effective counter-argument.
‘McDonald’s had a plan and ultimately performed on it,’ Duffy says. ‘The Ceo of Wendy’s ended up losing his job.’ Compounding the high stakes are modern communications – there is no room for an Iro to hear news and the reaction to it. ‘It used to be that one of your executives would say something in Singapore or Mumbai and it never reached the US,’ James says. ‘That’s no longer true.’ A 24-hour news cycle and the internet keep anyone who’s interested painfully well informed – and they’re all ready to question whatever the company does.
‘There’s no room for error at the Iro level any more,’ says Fromer. Investors also have widely differing agendas, and the mix of investor types with positions in any one company shifts quickly. ‘One proxy solicitor told me about a company whose investor base suddenly turned into hedge funds,’ Westcott says.
Institutions don’t even need the collective amount of ownership the activists had in the case of Take-Two to make their intentions known. ‘Look at Home Depot,’ says Duffy. ‘You had a less than 1 percent shareholder that caused a shake-up in management and the executive compensation philosophy.’
The only hope for Iros is to lay the groundwork for communications with everyone before a problem occurs. If bridges are built now, they will already exist when times are tough. That could mean the difference between living through a stretch of unpleasant time – or doing time in the unemployment line.