| |
Some features of investor activism in Europe. How should companies prepare?
by Professor Antonio Dávila
Activist investors are common players in the governance of U.S. public firms. They take a significant equity position in a company that they have identified as having room for improved management and force changes to unlock value. Most of the time, the negotiation between the activist investor and the board leads to changes that management implements and to the investor reducing the equity position. Yet, in a few but highly publicized cases, the disagreements reach the governance structure of the company, going as far as proxy fights where the incumbent board and the investor present to shareholders different candidates for the board. If the investor wins, the new board often replaces a large part of the top management team. The dismissal of incumbent board members and top management accounts for the reservation with which activist investors are received.
Activist investors have recently expanded their activity to Europe. As mentioned before, these investors target what they perceive as underperforming companies and with a corporate governance structure which can improve. Thus, if they do their work right, other shareholders should welcome their presence. Similarly, managers find in them a source of ideas to enhance their companies.
Still, the best way to avoid the stress that comes from activist investors targeting a particular company is to manage the company at its best. Yet, change in markets are accelerating, fueled by a myriad of new technologies hitting the market and the increasing competition from the opening of Asian countries. This new setting requires a new management paradigm that permeates from the board down to the bottom. The old paradigm emphasized execution as the source of value creation: companies executing flawlessly led in their markets. Today, execution is not enough. The new management paradigm goes beyond execution to embrace sensing opportunities for value.
Yet, Western companies’ main disadvantage vis-à-vis Asian companies is their legacy where execution was all that was required to succeed. Asian companies have been born into the new market dynamics; for them sensing opportunities is as relevant as executing to win. Adapting to this new paradigm starts with the board and the information that they receive for each meeting. Leading boards receive structured information not only about internal processes but also about opportunities opening up in markets. This latter issue is the core of a research project at IESE, where we have developed a significant expertise.
Antonio Dávila
Professor of Entrepreneurship and Accounting and Control
IESE Center for Corporate Governance
|
|
|
