Singing the praises of shareholder activism

Eric Rosenfeld wants to sing it from the highest mountain: shareholder activism works. As president and CEO of Crescendo Partners, a New York investment firm, Rosenfeld has made a name for himself on both sides of the border as a tough-talking (but sweet-singing) shareholder activist.

And yesterday, at a joint CFA Society–Goodman Institute event at the National Club in Toronto, Rosenfeld literally sang the praises of taking equity stakes in undervalued or poorly run companies. To the surprise of a room packed with investment bankers, stock analysts and financial pundits, Rosenfeld quickly explained the insight and tactics of a few of his highly publicized successful takeovers, only to break into not one, or even two, but three show-tune-inspired songs — all about the trials and tribulations of firing boards and making it to the proxy vote on time.

Yet, despite his humour-infused presentation style, Rosenfeld was firm and consistent in his message: investor activism works only when boards (and directors) fail.

“There are good activists and there are bad activists,” said Rosenfeld. “We are patient activists.”

This patience equates to a rather formulaic method of selecting and targeting companies suitable for shareholder activism.

“Initially we select based on screens. The criteria we use is standard — cash flow, enterprise value, P/E, low multiples, declining stock prices — the usual. We look for companies that are stuck and need shaking up.”

Once a company is selected, Rosenfeld and his company methodically set about acquiring between 5% and 20% of the shares and then launch a vigorous program of convincing shareholders — the true owners of the company — to vote for drastic and dramatic changes. Those changes can include voting the board out, firing the CEO, changing the chair of the board, voting to liquidate the company or simply voting on a proposal to notify majority stakeholders that people are restless.

“We look for companies with bad metrics,” said Rosenfeld, who confesses to getting target tips from employees, attorneys, investment bankers and even shareholders.

As a result, Rosenfeld has condensed the issues each shareholder activist will face into three separate but correlated problems:

  • Management in the company
  • Capital structure of the company
  • Bad division — one aspect of a company is losing money while the other sectors are making money

By addressing these issues in a shareholder meeting, Rosenfeld is often successful in prompting votes on initiatives to change the metrics of a company.

And Rosenfeld, whose MBA is from Harvard, believes that the ideal place to conduct this type of corporate change is on the floors of Canadian corporation shareholder meetings.

“All things equal, it’s better to conduct this activity in Canada,” explained Rosenfeld. “It’s a lot better from an administration point of view, and your structure makes a lot more sense, democratically speaking.”

For example, in Canada, a shareholder requires only a 5% stake in a company to call a meeting — not so in the U.S. Also, in Canada, boards rotate out in unison; in the U.S., board rotation is staggered, making it a “longer, more arduous process” to convince board members to join the activist team. Finally, Canadian corporations do not (and cannot) hide behind the Poison Pill — legislation that was instituted in North America in the 1990s to help boards organize themselves before shareholders were to decide on a fateful vote; U.S. companies, according to Rosenfeld, hide behind “the pill.”

While Rosenfeld does concede that Canadian corporations can be a tad more illiquid, he says this does not threaten his corporation’s plans. “We are patient shareholder activists. We are here to close the value gap.”

Unapologetic for his approach or his methodology, Rosenfeld states that his services and actions would be unnecessary if boards (and corporations) actively maintained shareholder value.

“Boards should always try and close that value gap, whether through stock buy-backs, dividends, good management or taking the company private,” he says. “If management does close the gap, there is nothing an activist can do.”

Originally published on Advisor.ca on September 17, 2008