How do you know if your company is likely to be a target for activists? And what is the best way to respond when approached by an activist?

Skadden M&A partner Ann Beth Stebbins discusses the activist’s playbook with Ted White of Legion Partners Asset Management, a veteran activist investor, and Elizabeth Gonzalez-Sussman, head of the firm’s Shareholder Engagement and Activism Practice.

Activists seek to identify companies where value can be increased. Some activists will focus on operational or governance improvements, while others will press for transactions that could release value, Ted and Elizabeth explain.

Ted and Elizabeth observe that shareholders are not always forthcoming with management, which may make it difficult of a board to understand shareholder concerns. Ted notes that, as an investor, he has observed cultural misalignment in some companies experiencing underperformance, and stresses that it may be important for board members to hear directly from shareholders.

Elizabeth says that, when meeting with activist investors, management and directors should listen to the issues that are raised. Ted says his firm will be trying to gauge if management and the board are aware of the concerns expressed in a meeting, and are willing to address, or at least consider, those. He also notes that directors should assume that the activist has talked to other shareholders about the company and the potential issues that the activist has identified.

Companies should be careful about responding defensively to activists, Ted and Elizabeth say. If the company reacts hostilely or dismissively, that may cause other shareholders to perceive that there is a problem. It could also prompt a more aggressive campaign by the activist to replace directors in the future, and cause proxy advisory firms to be more critical of the company.

If activists succeed in electing new directors, the existing board should attempt to work with them collaboratively, Elizabeth and Ted say, even though the contentious nature of a proxy fight may make cooperation challenging. Ted notes that board dissonance may encourage shareholders to seek to replace more directors at the next annual meeting.

Name: Ann Beth Stebbins

Title: Partner at Skadden

Connect: LinkedIn

Name: Elizabeth Gonzalez-Sussman

Title: Partner; Head of Skadden’s Shareholder Engagement and Activism Practice

Connect: LinkedIn

Name: Ted White

Title: Co-founder and a Managing Director of Legion Partners Asset Management

Connect: LinkedIn

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Investors often believe that companies are too slow to refresh their boards. Directors and CEOs may also think that their companies do not have the right mix of directors, as strategies change and some directors’ skills become dated.

Yet annual board turnover remains low and fairly steady, Spencer Stuart partner Laurel McCarthy tells podcast host, Skadden M&A partner Ann Beth Stebbins. Together with Skadden partner, Elizabeth Gonzalez-Sussman, Laurel and Ann Beth discuss the ways boards should approach refreshment, and the risk that they could be targeted by activist investors if they do not replace directors regularly.

Many board policies do not encourage refreshment. The typical mandatory retirement age for S&P 500 directors, has been increasing, and is now at age 75. “We usually don’t see many stats that surprise us in our annual board index, but this one did,” Laurel says. At the same time, the number of boards with mandatory retirement ages has been dropping.

Meanwhile, board term limits, when present in a company’s bylaws, are usually generous — 15 or 20 years. Proxy advisory services do not have prescriptive policies on term limits, but they question the independence of directors who have served for more than nine years on a board.

As Laurel and Elizabeth explain, age and term limits can encourage turnover, but they should not be the sole mechanism. Boards need to continually analyze the skills required by the board in light of a company’s changing strategies, and develop pipelines of potential new directors to fill those needs.

Elizabeth points out that companies that have a number of long-tenured directors may be vulnerable to activist investor campaigns if the company underperforms. Demands that a company appoint new directors to improve performance often figure prominently in activist campaigns.

Some investors may favor adding younger board members, particularly where the customer base is young or if technology is central to the business, Elizabeth says.

In evaluating potential board members, Laurel and Elizabeth suggest prioritizing candidates who have recent experience, are good cultural fits and ask tough questions that management should be prepared to answer.

Ultimately, they advise boards to be proactive, as succession planning and maintaining a pipeline of potential directors is critical to a company’s future performance.

Name: Ann Beth Stebbins

Title: Partner at Skadden

Connect: LinkedIn

Name: Laurel McCarthy

Title: Consultant, Board and CEO Practice, Spencer Stuart

Connect: LinkedIn

Name: Elizabeth Gonzalez-Sussman

Title: Partner, Shareholder Engagement and Activism, Skadden

Connect: LinkedIn

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What do investors think makes a board effective? Skadden M&A partner Ann Beth Stebbins kicks off the discussion with that question with her guests, Allie Rutherford and Adrienne Monley of PTJ Camberview, which advises companies on shareholder relations.

It's a board that evolves with the trends, says Allie. It's a board that discloses its composition in a way that conveys how the skill sets and the experiences of particular directors and directors in combination meet the business and strategy needs of the particular company.

Companies need to show investors that they have right directors and that those people are doing the right things as a team, following practices and engaging together in a way that supports value creation, says Adrienne. It is incumbent upon companies to be specific and help investors understand, perhaps through anecdotes, the human perspective about what's happening in the boardroom — how they run meetings and bring in outside voices, for example. Being generous with those descriptions, both in written disclosures and in engagement with investors, will help promote where investor support and understanding.

In terms of directors' skill sets, not everybody has to have every skill. It's how all of those come together, says Allie. And boards can supplement that by bringing in outside expertise.

Investors also want a board to be doing things that improve the efficacy and the functioning of the board as a team, says Adrienne. As a result, today more board self-assessments include things like independent interviews.

Because few investors have first-hand boardroom experience, it can be helpful to have direct discussions with your top investors about the board's functioning, says Adrienne.

Name: Ann Beth Stebbins

Title: Partner at Skadden

Connect: LinkedIn

Name: Allie Rutherford

Title: Partner, PJT Camberview

Connect: LinkedIn

Name: Adrienne Monley

Title: Managing Director, PJT Camberview

Connect: LinkedIn

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