Correspondence: Ian Campbell, The Abernathy MacGregor Group, 707 Wilshire Blvd, Suite 3950, Los Angeles, CA 90017, USA. Tel: +1 (213) 630-6550; Fax: +1 (213) 489-3443; E-mail: IDC@ABMAC.COM

¹is Vice Chairman of the Abernathy MacGregor Group. He heads the firm's investor relations and crisis communications practices. Prior to founding the firm with James Abernathy in 1985, he was a reporter and editor at the Wall Street Journal, and later, an executive at CBS Inc. and American Broadcasting Companies, Inc.

²heads The Abernathy MacGregor Group's West Coast office, providing counsel to clients in the areas of investor relations, crisis communications, financial public relations, mergers and acquisitions, and issues management situations. Prior to joining AMG in 1997, Mr. Campbell was Senior Vice President of corporate communications for Great Western Financial Corporation, and Deputy Director of the California Department of Commerce.

Received 22 October 2007; Revised 22 October 2007; Published online 13 December 2007.

EXECUTIVE SUMMARY

Investor activism has become an established strategy used by institutional investors, especially hedge funds, to enhance returns on their investments. These investors target corporations whose share price underperforms its peers and which either can be readily acquired or can generate and distribute substantial amounts of cash to shareholders. They use publicity and proxy contests, or the threats thereof, to persuade managements to accede to their proposals. Unlike single-issue activists, who genuinely seek to reform corporate governance, investor activists are more likely to use criticisms of governance to put pressure on management. Recent research suggests that activist proposals, when implemented, do not create value for shareholders. Activists generally follow a pattern: First, they make a threshold-level investment. Secondly, they present a performance critique and a value-creation proposal to management. Thirdly, if rejected, they begin public criticism of the company's performance and governance. Fourthly, they seek support from other investors. Fifthly, if these steps do not lead to a satisfactory result, they launch a proxy contest seeking representation on the board of directors. Activists are often successful at winning support from other investors, including some for whom following other activists is a core strategy. When they launch proxy contests, their chances of success are relatively good. A company's best defence against activist predation is to win and maintain the endorsement of its largest shareholders before there is any sign of activist interest in its shares. This requires communication of a credible business strategy that explicitly includes a strategy for shareholder value creation. Once an activist investor takes a position in a company's shares, the best response is an ongoing dialogue with the investor. Both company and investor have incentives to avoid the costs and risks of a proxy contest, so it is often possible to reach an accommodation. Because this cannot be guaranteed, companies need to give serious consideration to the circumstances in which they would accept one or more activists as members of their boards of directors.