By all accounts, activism in the US is likely to increase, and even become more aggressive, as investors push for changes in companies they see as underperforming or not living up to their full potential. Andrew Freedman, a partner and co-chair of Olshan Frome Wolosky’s Activist & Equity Investment Group, spoke to Activistmonitor on upcoming trends in the space. Freedman has advised the nation’s most prolific investors, including Starboard Value and Elliott Management.

Activistmonitor: As US markets turn frothy, are we seeing any emerging trends in activist demands in the US so far this year?

Andrew Freedman: Many companies are trading at or near their one-year high and there is some skepticism as to whether the fundamentals support the current valuations. There is risk and responsibility for management to perform as the reversal of these valuations would be value lost for shareholders. We will continue to see activists push for strategic M&A reviews at companies where they believe a sale now at a premium to the current market price would provide the best risk-adjusted outcome for shareholders. At companies who are underperforming in these markets, we are seeing activists continue to surface with sophisticated operational recommendations and other suggested changes, including management and board-related ones, for turning things around, like Third Point at Nestle and Engaged Capital at Hain Celestial. As part of that, activists are also directly targeting CEOs like never before as the source of the poor performance, like at Arconic and Buffalo Wild Wings.

Activistmonitor: There has been a spate of activism in large corporates that could or has already lead to M&A, including the bid by Amazon for Whole Foods spurred by Jana PartnersStarboard Value’s push in Parexel International which lead to a sale to Pamplona Capital. Is this a trend that you think will continue going forward?

Andrew Freedman: Activists have cemented themselves as fundamental to the functioning of M&A and that’s not likely to change anytime soon. At companies where there is a crisis of confidence in management’s ability to perform and perceived standalone risk, a sale may very well be the best alternative for maximizing value. Activists are constantly weighing the execution risk of a turnaround against the premium that a sale could garner at struggling companies with attractive assets. When you combine declining performance with a status quo-minded board, activists are more likely to push for a sale process. This is not the product of “hit and run” activism as some have suggested, but rather the result of a deep, well-reasoned balancing analysis by the activist. Companies should also be aware of the significant risk and pressure to perform when they rebuff offers at a premium. We have seen several recent examples of companies who have brushed back M&A overtures only to see their valuations deeply cut when they subsequently underperform expectations. These underperformers are becoming the next wave of activist campaigns.

Activistmonitor: What kind of moves are activists employing to attempt senior level management changes? For example, the recent changes seen in GE and Uber.

Andrew Freedman: Activists are not just spelling out that management changes are needed at companies, but they are actually coming to the table with world-class, transformational CEO candidates. We’ve been at a point for a few years now where activists are able to attract and recruit exceptionally qualified executives to their slates. Publicly linking a CEO to a struggling company’s underperformance puts significant pressure on the CEO to turn things around. When the struggles continue and the board resists management change, activists are more frequently using proxy contests to directly put a target on management, especially where the CEO is up for election. We’ve seen this now at Arconic, Buffalo Wild Wings, and Green Dot, among others.

Activistmonitor: What preemptive steps are corporates taking to deter unwanted approaches?

Andrew Freedman: On the one hand, some boards are behaving badly in response to activist involvement, largely on the advice of overzealous defense advisors. This past proxy season witnessed shareholder-unfriendly bylaw amendments to curb special meetings, attempts to reject activist nominations, poison pill adoptions and other corporate governance manipulations aimed at entrenching management and the board. In other instances, companies are looking to make some changes on their own, like board refreshment or a strategic review, to keep the activist at bay. Yet still, other companies are looking to play nice and engage cooperatively behind-the-scenes with certain activists to avoid a public confrontation. Once we know who the company’s advisors are, we have a pretty good idea for what type of engagement the activist has in store with the company and how the company will respond.

Activistmonitor: Are headhunters changing strategies as they recruit C-level corporate executives? Are they hiring more women on boards and is the role of women on boards changing?

Andrew Freedman: Gender diversity on boards is a hot-button governance topic. Just about every board refreshment over the past year has involved the addition of at least one woman. As part of its QualityScore analysis, ISS now looks at the proportion of women serving on the board, and it’s no secret that gender diversity is important to institutions like State Street and BlackRock. Women figured prominently in the highly public proxy contest between Elliott and Arconic this year, with Pat Russo playing a leading role for Arconic and Patrice Merrin joining the board as one of Elliott’s director candidates. More than ever, there is a critical mass of highly accomplished women who have matriculated through the C-suite and who are eminently qualified for board service. As a result, boards and activists are nominating more and more women as directors on their board slates.

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