Safeguarding reputation in the age of activist investors

 7th February 2023    PR Insight 
 Paarul Chand

Never have companies received sharper attention than before from activist investors. In such a situation how can communication professionals play a role in the safeguarding of reputation?

Well-intentioned activist shareholders can be the voice of stakeholders

Nitin Mantri, group CEO, of Avian We opines, “Investor activism isn’t a new phenomenon. In the last couple of years, we have had several examples within India itself, where corporate heads have been removed from their seat of power primarily because of a loss of investor confidence.

Well-intentioned activist shareholders can be the voice of stakeholders. They can steer a company towards the direction of much-needed change. But there could be instances when an activist investor’s scrutiny can put a company in the line of fire without giving them a chance to respond in time. So, they must ensure that their facts are correct and not overreach in their activism."

Mantri adds, "When faced with criticism from an activist investor, a company's reputation can be protected if it has a history of credibility and trust. Reputation building is not a one-time affair. It takes several years, sometimes decades, of sincere communication with stakeholders, i.e., shareholders, employees, customers, vendors, analysts. An organisation is perceived as reputable when it can build positive narratives across all facets of its business (vision, leadership, governance, financial performance, employee well-being, community) and demonstrate this in action.

Organisations who have fulfilled their responsibility towards stakeholders with honesty may hit some bumps in the short term but will eventually emerge stronger and more trustworthy.”

NS Rajan, former founder of Sampark PR which was later acquired by Ketchum and rebranded as Ketchum Sampark, and current founder of August One Partners LLP says, "There is a lot to be done before even one faces criticism. It may sound hackneyed but you have to build trust first. Trust is like a Teflon coating. It's easier to handle criticism if you have set the highest standards of governance and are trusted. For example, do you have a reputed auditor, a set of truly independent directors on your board, detailed disclosure, high governance standards and credible investors? The most important thing is whether are you seen as adhering to the spirit of the law, otherwise, long-term investors start questioning".

Rajan adds, "Post-ESG people are becoming very careful, fund managers cannot afford to make mistakes. There is intense scrutiny and far more questions now about how fair are the transactions and especially with related parties. Activist investors and their demands for high disclosure standards have only gone up significantly in the last many years. “

Rishi Seth seasoned communication professional and former chief client officer, BCW APAC and co-founder of 6 Degrees BCW agrees saying, "Ethical business practice has to be ingrained in the DNA of a company, rather than an initiative to address concerns by an activist. 

Governance is an important part of the ESG equation and all stakeholders including employees, government, regulators, suppliers and customers are concerned about governance and not only the investor. Therefore, everything that a company does starting with independent boards with strong directors to articulating and sharing regular communication with investors, and sharing any issues along with the highlights are important confidence builders for a company’s reputation. It is an ongoing effort rather than any one particular initiative."

Bring back the conversation on corporate governance 

Nandita Lakshmanan, founder and CEO, of 'The PRactice,' points to a need to reset the obsession with valuation. She says, "We need to bring back more conversations around corporate governance. In the last few years, governance has taken a back seat with valuations, funding, and scale taking the driver’s seat. These mean nothing if a business is not governed well and within corporate government, standards prescribed by regulators and good management practices."

She adds, "Corporates must recognise that they are always under scrutiny. This should determine their behaviour and actions. They must follow gold standards in corporate governance, sharing information in a timely and accurate manner to all stakeholders. After all, isn’t the objective of corporate governance building trust and credibility among stakeholders?"

Lakshmanan cautions, "Even the best-intentioned companies can be caught in activists’ nets. It is naïveté at best and arrogance at worst, not to expect scrutiny by stakeholders. As mentioned above, transparency is the hallmark of good corporate citizenship. Besides, commitment to ethical business must be demonstrated by consistent behaviours and actions, and not merely lofty announcements."

Sandesh Advani,  executive vice president and lead – of government and public sector units vertical at Concept Public Relations India Limited lays down a 3 part plan for protecting a company's reputation when facing criticism from an activist investor:

1. The company must always be transparent and open about its operations, financial performance, and plans. This type of transparent operation helps build trust with stakeholders and helps mitigate the impact of negative criticism.
2. The company can constructively engage with an activist investor to understand concerns and resolve disputes amicably. Such an approach helps prevent the issue from escalating and damaging the company's reputation.
3. The company can implement proactive measures to mitigate any risks to its reputation, such as conducting internal audits, improving corporate governance, and regularly communicating with stakeholders.

Transparency and clarity are key 

Seth comments that "In today’s environment where the information cycle is always on, transparency becomes very important. If you let the issue fester and don’t respond with all the information on issues raised, then the narrative of the crisis will be taken away from you and get driven by interested stakeholders."

Seth adds, "In the situation of an adverse incident or news, the company needs to connect with the concerned stakeholders (Shareholders, regulators, bankers, employees, suppliers amongst others)with agility and communicate clearly. Basically, initiatives such as investor calls, media briefings and meetings with bankers and regulators need to be done sooner than later. Also, vague and delayed communication leads to more damage to the reputation of the company."

Sandesh Advani adds that "A company can proactively address potential reputational concerns raised by an activist by implementing ethical solid and compliance policies, regularly reviewing and updating its processes, and ensuring that employees are periodically trained and held accountable for implementing these policies. 

The company can also demonstrate its commitment by participating in industry initiatives and partnerships that promote responsible business practices and actively seeking stakeholder feedback and input. By taking these proactive steps and effectively communicating its efforts, a company can build trust and credibility with its stakeholders and reduce the likelihood of reputational concerns."

To what extent should disclosure go?

Rajan, a veteran of investor relations and financial communication who has seen the evolution of Indian stock markets post liberalisations, explains that earlier, even 10 -15 years back, Indian companies would find it difficult to raise money from strongly regulated markets such as the USA due to their stringent disclosure norms. They would rather raise debt and equity from India than internationally.

However, that has changed now. Indian disclosure compliance norms are also now pretty strong in comparison to where it was earlier and companies are getting used to greater transparency.

Rajan adds, "The classic case is of Infosys, over 20 years ago they came as a breath of fresh air, and set a new bar for high governance and disclosure standards. They were middle-class entrepreneurs and wanted you to believe shareholder money was sacrosanct. While credibility is built over years but from day 1 you need to be absolutely transparent and adopt the highest governance."

Communicators, however, may also ask how much is too much disclosure.

Seth has a clear-cut answer to that. He says, "I believe that if you are an ethical company the need to hide any information will be minimal and therefore transparency levels should be very high. The only information which needs to be protected is in competitive advantage, IP and future performance. 

Seth adds, "This is true, especially for a listed company which is supposed to be publicly owned. The rest of the information needs to be anyway shared on a regular basis to keep the various stakeholders updated."