Activism not a zero-sum game

It doesn’t have to be an us versus them situation and the focus doesn’t have to be short term — necessarily. Instead when an activist comes knocking with a plan it can end up as a rewarding — and hence valuecreating — experience for both shareholders and management.

In other words, it’s situation specific, meaning the outcome depends on how open — or shut — is management and the board to what the activist is proposing and on how well-engaged is the company with its shareholders. And the more open and the more engaged, the less likely the battles and the more positive the outcome.

That was one of the themes conveyed at this year’s Activist Investing In Canada that was held in Toronto on Monday.

Zachary George of Connecticut-based Front Four Capital, an activist investor in Canada for many years, spoke about the activists’ supposed short-term focus. He said his firm’s “most successful activist investments have been five years in duration and all with some element of operational turnaround.” George used the term “knee-jerk” when management labels the activist as having a shortterm focus.

New-York-based George Hebard of Barrington Capital Group, whose motto is creating value through activist investing since 2000, endorsed George’s views.

“We try to take a two- (to) five-year time horizon,” noting there are “few examples” where it can be said the activists’ interests are “short term.” The one possible exception is the demand to sell the company. “Generally we are looking to double our money over two-five years and more than that over a longer period of time,” said Hebard, whose activism has included spats with The Eastern Co., Avon and DHI Group. And gains of that magnitude “probably won’t happen just by selling the company.”

Hebard then referred to Barrington’s campaign for change at EBix, a supplier of on-demand software solutions & E-commerce services to the insurance industry. That campaign started in late 2014 — when the stock was around $15 a share — with a demand for three new independent directors. Almost two years on, and with the stock closing Monday at $58.85 Barrington is still an enthusiastic owner. Put it down as a victory for having a “multi-year time horizon” and a consequence of the activist presenting “white papers” to the board and management on future direction.

Such presentations are “effective,” Hebard said, because the board is looking at a range of issues and because an “optimal resolution” can’t be reached via a two-page letter. “It requires thoughtful analysis,” and shows the issues faced by the board have been considered. “It also shows the recommendations are not narrow-minded, simple focused or short-term oriented.”

Catherine McCall, director of Policy Development at the Canadian Coalition for Good Governance, said activism has played a key role in “say on pay” resolutions. “A strong say on pay gives the board more ability to deal with management, to have more backbone,” she said because it allows for a compensation regimen “more linked to long-term performance.”

One of the more interesting discussion topics was on “board dynamics,” or what happens to the group that oversees management — when new directors are added. The feeling was that one director can effect change.