Note: Updated Sept. 8, 2006 to add preliminary voting results from Heinz.
By Dominic Jones
SHAREHOLDER activism is on the rise. Hedge funds are wielding more clout. Proxy battles could be made easier and cheaper. New exchange rules will make it harder for directors to get votes. Majority voting for director elections is set to become a de facto standard.
Welcome to the new world of shareholder relations — an environment where talented online communicators can distinguish themselves as valuable assets to their companies. By building strong, trusted lines of communication with company stakeholders, online communication professionals can give their companies a strategic advantage and protection against opportunistic raiders.
The recent high profile proxy fight between food giant Heinz and activist investment fund Trian Group is a superb example of what happens when companies neglect their communications with shareholders and investors. They become sitting ducks, easy targets for people who know how to exploit situations where companies have failed to earn the support and understanding of their shareholders.
Over the past two years, our reviews of Heinz’s online investor relations communications found the company to be severely lacking. In fact, in our most recent review in May 2006, Heinz managed a total score of just over 20 points out of a possible 100. The company ranked 44th out of 51 consumer staples sector firms. While the company was probably complying with every securities law it was required to, it wasn’t communicating.
Consequently, Heinz’s management team and its directors were ill-prepared and vulnerable when Trian’s Nelson Peltz took them on. They had left the door wide open for someone to step into the gap they had left between the company and its shareholders.
Admittedly, Heinz was able to muster a spirited defense –- with outside help — and for that the company deserves credit. But it would have been so much easier, less costly and involved much less of management’s and the board’s time if the company had been communicating effectively with its investors all along.
The results speak for themselves. In the end, Heinz was not able to completely rebuff Trian’s attack. According to results released by the company in September 2006, Trian, which only holds 5% of the company’s stock, won two of the five board seats it fought for.
Heinz was fortunate that Trian was not a stronger adversary. Had the company been up against a more formidable force, like the now famous Save Disney campaign, I have no doubt that it would have been a completely different story (Trian 5 – Heinz 0).
Companies often neglect IR until it’s too late
The Heinz experience is not unique, of course. Companies often find their existing investor communications capabilities lacking when they are tested.
A 2001 PriceWaterhouseCoopers report, Hostile Engagements, based on interviews with executives who had experienced hostile bids, found that many companies realized they had been neglecting their IR and PR programs only when they most needed to secure support from their shareholders.
Consequently, companies were forced to hire in support from outside investment bankers and proxy communications specialists, often at steep cost.
The report says that CEOs and CFOs who were interviewed recommended that companies build stronger lines of communications with their shareholders before any potential bidder comes along.
Web is ideal for building relationships and trust
This is where companies’ websites have a vital role to play and where investor relations website managers can be significant assets to their companies. A strong web-based communications program gives a company a strategic edge should it come under attack from raiders.
Companies often discount the Web channel because they view it as a retail investor resource. And since retail investors typically don’t have the ability to organize themselves into big voting blocs, companies may consider them an unimportant constituency.
But that’s a big mistake because pension funds and mutual funds often are influenced by public opinion when deciding how to vote in contested votes. Companies that have earned the public’s trust and who can communicate their message effectively to a mass audience will be better able to limit protagonists’ ability to influence public and media opinion.
A well-run IR website can create a central meeting place for the company to engage its shareholders and demonstrate the company’s goodwill and credibility over time, all at a fraction of the cost of print or in-person communications.
A key challenge, of course, is to coax the company’s shareholders and other stakeholders to use its website. This means making the website a compelling and meaningful destination, not just in special situations but all of the time.
You probably don’t have the right resources
There are many strategies and tactics that companies can employ to attract and engage shareholders on the Web. We provide advice on these to members of IR Web Report’s continuing benchmarking program and in our IR website Scorecards and Benchmarking Reviews.
However, the advice we provide is useless unless there is a commitment from companies to put in place the necessary resources to implement and manage them over the long term.
At minimum, we believe that all large companies should have an internal investor relations website manager. This should be a core position in the IR department. The individual should work closely with other internal website managers and coordinate outside suppliers specifically for the IR site.
It is impossible to fully outsource effective IR website management. While companies like Thomson Financial, Shareholder.com, Hemscott and Investis can take care of many routine compliance- and technology-related tasks, they cannot replicate the insight and focus that internal IR website managers bring to the table.
Having an IR website manager also does not preclude your company from using outside services. In fact, it is unwise or even impossible not to use outside vendors for IR website services. Furthermore, many available services are more cost effective than if the company was to develop them internally.
The point is that it doesn’t matter how your website is hosted or which vendors you use, having a dedicated internal IR website manager is a prerequisite today if you hope to build relationships with your shareholders online, attract new investors, and meet the information needs of sell- and buy-side analysts who follow the company’s reporting closely.
Prepare for the unexpected
Companies which manage their IR websites and broader IR programs effectively are probably less attractive targets for corporate raiders and activists. However, they should nonetheless be prepared for the eventuality that someone will be stupid enough to take them on.
All companies should probably have a proxy battle handbook and a dummy proxy defense website ready to go into action at short notice. The manual might address such questions as lines of responsibility and communication policies. The scope, structure, content and usability of the defense website must be clearly defined.
Some useful guidelines for proxy defense websites were provided last week by James Handslip, account director with London-based corporate website developer The Group. In addition to the usual proxy materials, news releases and presentations, he also recommends that your proxy solicitation site:
- Use a unique and memorable domain. In the Heinz-Trian battle, both parties used unique URLs. The company used www.heinzsuperiorvalue.com while Trian used www.enhanceheinz.com.
- Convey your company’s message prominently and clearly on the site home page. Heinz did this effectively with short key messages prominently across the top of the page, while Trian’s was smaller and less effective.
- Link to or republish news articles. Both Heinz and Trian did this. Posting all news articles serves two purposes. They demonstrate that the company is not trying to stifle debate, and they add credibility to the website because they are presumably impartial.
- Provide mechanisms like email alerts for shareholders to stay informed of developments. RSS should be available, too.
The above points are all good, but increasingly we expect that companies will have to go further and be more responsive and accessible to their shareholders during proxy battles.
Perhaps the most important time in any proxy battle comes immediately after the vote. This is when shareholders’ interest is at its peak, when they want to know the outcome of their participation.
It is vitally important that the company provide the poll results immediately after the meeting – even if they are preliminary. Company management should also use this time to acknowledge the participation of all shareholders and make a point of thanking them.
It’s never over, even when it’s over
In the long run, however, companies’ best insurance is to work every day to engage and reinforce their relationships with their shareholders. This requires companies to put in place the required resources to be able to manage their IR websites proactively.
Not only can a well run web-based IR program give a company greater confidence and a stronger starting point in a proxy battle, but it can also serve as a disincentive for predators to target the company in the first place.