by Michael Useem and Dennis Carey – Harvard Business Review
Activist investors, though neither barbarians at the gates nor corporate raiders, can still seem very unwelcome. Anxiety, fear, even dread are among the predictable reactions in the executive suite and boardroom when they unexpectedly appear.
But as we have suggested elsewhere, activists are here to stay, and are increasingly prominent players on the equity landscape—sometimes even inside the company boardroom. More than 200 activist-investor initiatives hit companies in 2013, a seven-fold increase over a decade earlier.
Contrary to the adverse experience of some governing boards, activist investors can actually prove to be a leadership asset on the board rather than a disruptive force—providing the boardroom is well-managed and led. We have especially come to appreciate this fact from the experience of one major company and its successor—Motorola and Motorola Solutions— that have had more than their share of investor activists at the table in just the past five years.
Founded in 1928, Motorola diversified over the decades from car radios into a host of communication technologies, ranging from equipment aboard Apollo 11 to the best-selling RAZR mobile phones. But Motorola’s markets were transforming in the mid-2000s, and chief executive Greg Brown and his board decided in March 2008 that the company should be split in two: Motorola Mobility would take its mobile phones and related devices, and Motorola Solutions its mission-critical data and communication products.
It was the directors’ decision to make, but it was one helped to catalyze into reality by Carl Icahn. Founder and primary owner of Icahn Enterprises, Icahn had been tagged a corporate raider for his hostile takeover of TWA in 1985. But in recent times a better sobriquet has been that of activist investor. He acquired large blocks of stock in companies as varied as Apple, Biogen, Time Warner, U.S. Steel, and Yahoo, and then shouldered his way onto the boards of some.
After Icahn Enterprises initially acquired a 4 percent stake in Motorola in 2007, the company invited Icahn allies Keith Meister and William Hambrecht onto its board in April 2008, shortly after directors had approved the breakup. As Brown explained to us, he believed in Motorola’s separation, he had recommended it to the board, and he was clearly ready to do it. Because it was the “mother of all decisions,” it was also one whose execution could have been slowed or even stalled by its own gravity.
Here is where the activist voices came in, supporting the separation and facilitating its execution. While the breakup was an historic action that Brown and the board had concluded was essential, Icahn’s representatives helped enable Brown to achieve the parting.
Google acquired Motorola Mobility in 2011 for a better than 60-percent premium, and Brown remained as chair and CEO of Motorola Solutions, overseeing its 23,000 employees and $8 billion in annual revenue. Amply rewarded for their activism, Icahn and his allies exited the boardroom, but a new activist investor soon came knocking. It also sought a seat on the board, primarily concerned that the firm’s intrinsic value had still not been fully appreciated by investors.
ValueAct Capital, a San Francisco hedge-fund with more than $11 billion under management had made a habit of investing in a limited number of companies that appeared undervalued or not fully understood by investors—and it now wanted into not only Motorola’s stock but also its boardroom. ValueAct acquired nearly 6 percent of Motorola Solution’s shares and later upped that to 10 percent.
When ValueAct called to propose a board seat, Brown was surprised. He had not anticipated another activist joining the board so soon after one had left. As Brown thought about it and warmed to the idea, his attention turned to the activist’s potential contribution in the boardroom. Would the new activist be strategically aligned and prove to be a good fit? Would the activist bring the kind of expertise and experience in working with management that was essential for any new board member?
Brown conducted the due diligence required of a director candidate. A partner with ValueAct, Bradley E. Singer, looked very appealing with a good track record of value creation. He had earlier served as chief financial officer of two publicly-traded companies—Discovery Communications and American Tower Corporation—and would bring additional financial experience on capital allocation. Singer came on the board in October 2012. From the inception of Motorola Solutions stock at the end of 2010, its price rose by some 90 percent over the next three years, roughly twice the rise of the S&P 500 benchmark.
Greg Brown reports that the investor activists who have served on his board have all had an affirmative impact on his firm’s performance. Not surprisingly, other company leaders with activists at their gates have since reached out to him, and Brown would pose two questions to those who are considering whether to bring an activist in from the cold:
1. Are the firm’s strategy and activist’s agenda well aligned?
2. If the strategy and agenda are aligned, will the activist add an expertise that the board’s needs, and will the activist work well with the board’s culture?
Activist investors need not be a short-term extortionist nor a wrecking ball in the boardroom, and from Greg Brown’s experience at Motorola and then Motorola Solutions, we have a proof of concept. Brown cautions that each engagement with an activist must be treated as unique. But we also appreciate from his several experiences that activist investors—when well-vetted and well-aligned in a well-led boardroom—can function in ways that private-equity principals have long served in their target boardrooms.
In doing so, activist investors are not just benefitting from a company’s leadership. They are also contributing to it, a new force that is transforming boards from largely ceremonial into shareholder monitors and now into company leaders.