IN-DEPTH: Refreshing the board amid activist pressure
More U.S.-based companies are reexamining the composition of their boards following an activist advance, as they adjust to a more complex and demanding corporate landscape where all directors are more vulnerable to investor scrutiny.
According to Diligent Market Intelligence (DMI) data, the number of U.S.-headquartered companies that made new director appointments within 12 months of receiving an activist demand has continued to climb, with 48 opting to do so in 2021, 52 in 2022 and 65 in 2023. In the first eight months of this year, 29 companies have added a new face to their board, while 23 moved to remove an incumbent.
"Every board member is vulnerable now,” Jon Solorzano, counsel, ESG at Vinson & Elkins told delegates at the recent Diligent Elevate conference in Texas. “Every director needs to stand on their own merits and have a reason to be on your board. And you need to communicate that to the market.”
The case for change
While such changes to board composition can often be viewed as reactive by the activists pursuing reforms, company boards position such refreshes as a standard part of succession planning, a vital part of the functioning of any board.
“In order to do really good board refreshment a public company should always have a pipeline of potential new director candidates and a good director succession plan, and if they do that the board changes that occur after the activist shows up may be part of their good high quality board refreshment practices rather than the reaction to the activist,” said Sean Donahue, co-chair of shareholder activism and takeover defence at Paul Hastings.
“The fact that they just decided to enhance their board after the activists showed up doesn't mean that the activists should get to claim credit for it but they will.”
Many will also periodically assess vulnerabilities on their board to prepare for future crisis situations. "The best boards tend to put on the activist hat and look at their potential vulnerabilities from an outside-in activist viewpoint, then take steps to mitigate those vulnerabilities," Catherine Morris, director at PJT Partners, told the Diligent Elevate gathering.
Appeasing activists
However, moving to refresh the board without sufficient engagement with the investor base can be a risky strategy and is often considered too late once the activist presents a case for change, as Ryan Nebel, vice-chair of the shareholder activism practice at Olshan Frome Wolosky, told DMI. "If an activist has put forth a slate of candidates and the company just adds its own directors in response without engaging with the activist or with other shareholders, it's likely to create more issues than solve problems because it really just bolsters the notion that this board is entrenched in its own way of doing things and isn't open to independent voices in the boardroom."
Southwest Airlines has refreshed its board on three occasions since Elliott Management began its push for reforms, most recently on September 26 adding a former director at Spirit Airlines.
However, in response to the late June addition of Rakesh Gangwal, co-founder of Indian carrier InterGlobe Aviation, Elliott argued, "Among the criteria for selecting this new director was clearly that he would be supportive of Southwest's current leadership and status-quo approach."
A further revamp unveiled by the airline in September saw seven board members resign, including Chairman Gary Kelly. Still, Elliott presses on.
And, in what was considered as one of the most significant board revamps in recent decades in Canada involving as many as 17 candidates, Gildan Activewear, pursued at the time by Browning West for eight seats on its board, unveiled a shock announcement in May that its full 12-member board of directors had resigned, with targeted Vince Tyra stepping down as CEO. Just a month before, Gildan had unveiled a remake that would see five new independent directors join its board as replacements for five incumbents. "While we are disappointed that the board ignored the clear will of its shareholders for so many months and spent tens of millions of shareholder capital in an effort to defend its mistakes, we are nevertheless gratified that the current board has decided to cease its campaign activities and pave the way for an orderly and conclusive leadership transition," commented Usman Nabi and Peter Lee of Browning West.
Quality candidates
As boards respond to changes under the universal proxy card which make each director more vulnerable, as well as an evolving governance landscape with new risks including artificial intelligence and cyber security, many argue that investors are most likely to focus on the quality of candidates whether advanced by management or a dissident.
“Institutions are largely going to put aside the noise from each side as to why the changes were made and really look at the quality of the addition versus the subtraction,” concluded Donahue.
