Nearly every week, I have several conversations with CEOs or corporate directors about their growing frustrations with activist investors and often each other.
Today’s aggressive shareholder activism against companies and their boards target poor performance. But the real aim often is over strategic direction, capital allocation and return of capital, and executive compensation – all really governance issues.
Crusading shareholders spend hundreds of hours and hefty sums to study their targets and prepare their perspectives. They (usually) come with a very informed perspective, grounded in shareholder value and sound economic principles.
In 2017, activists deployed record capital – double the 2016 amount – across 193 campaigns worldwide and secured 100 additional board seats, according to FactSet, Activist Insight, and public filings. In 2016, companies settled 47.5 percent of the proxy fights, indicating that targeted companies may resolve an issue rather than risk a shareholder vote. Activism clearly drives change.
With this growth in activism (and their success rate), it raises a fundamental question:
Does the current board construct work?
Boards often have common drawbacks:
- Time spent: In contrast to the immense amount of time activists spend understanding their targets, boards usually meet only a few times a year and directors acknowledge they often don’t spend sufficient time on their board duties. Directors in 2015 told us they were devoting five more days to board duties than they did in 2013 but still fell five days short of their “ideal” board time, and the new McKinsey survey of 1,100 directors finds that directors in 2017 spent two days less on board duties than in 2015, to 24 days from 26. The limited amount of time makes it difficult to really engage on the critical issues (e.g., strategy) and spend adequate time with customers and investors to really understand the mindsets of key stakeholders required to truly guide the company.
- Board makeup: Often boards are looking to fill open seats with other active operating executives. But given the time it takes to really have impact; how can an active operating executive have the time to be a “great” board member and do their day job?
- Lack of diversity and key expertise: An absence of diversity continues to be a major deficiency in terms of gender, race, ethnicity and experience – and that defect hinders the ability to obtain diverse perspectives. In the new McKinsey survey, only 43 percent say their board is diverse enough to ensure relevant perspectives are represented in decision-making. Another growing problem is the shortage of board expertise in increasingly critical areas: technology, cyber security, research and analysis, talent acquisition, and customer growth and care, among others.
- Knowledge gap: Our 2013 survey of 772 directors revealed a shocking lack of comprehension of their companies. Only 16 percent said directors strongly understood the dynamics of their industries, just 22 percent said directors were aware of how their firms created value, and a mere 34 percent said directors fully comprehended their companies’ strategies. Our latest survey indicates these findings haven’t changed much since 2013. Frankly, these flaws limit the effectiveness in the board and often lead management to limit interactions with their board by trying to manage through meetings, rather than viewing the board as a helpful source of new ideas and expertise and a sanity check on strategy.
All of this begs questions for further debate:
- What should be the role of a director? How can they play more of the internal activist?
- Should we reassess the criteria for directors?
- What are the most critical topics boards need to be educated on? What is the best way to do so?
- How should directors be spending their time to have the greatest impact?
- How can CEOs help directors increase their effectiveness?
I plan to continue to explore these topics and others of interest to executives around the globe. I welcome your engagement in this conversation.