“Dear Mr. Rock, as a shareholder of MLR Media, we are disappointed with the recent performance of the company, but believe we have constructive ways to unlock significant value.”
So began the activist letter we drafted last quarter. At a recent Editorial Advisory Board meeting of Directors & Boards, a sister publication of Private Company Director, one of our board members told us that the CEO of a Fortune 100 company asked her and a few other directors to role-play as an activist investor. These directors wrote a letter critiquing the company as activists would. This exercise proved very useful in identifying opportunities to create value and speeding up the pace of change at the company. Every year since, a few directors update the letter.
As a private company, we do not need to worry about shareholder activists (although, for some family businesses, there can be shareholders whose differing views and goals squarely put them in the dissident shareholder category). Nevertheless, the exercise was just as impactful for us as it was for a public company. It forced us to confront a number of issues, including some that most of us knew about, but tended to be unwilling to formally address. The simple act of using an outsider’s lens and putting on paper where the company was underperforming (as well as proposed solutions) proved to be a helpful framework.
While strategy formulation is the province of management, the assessment of that strategy is a key function of the board. However, according to a March 2023 Spencer Stuart Director Pulse Survey on director time commitment, 69% of directors felt their boards needed to spend more time on strategy assessment. For public companies, compliance-related items, although necessary, can consume scarce board time. Private company boards, on the other hand, have significant flexibility in their agendas. With fewer and frequently more engaged shareholders, they are bound by fewer regulations. Private company boards thus have more time to devote to assessing the company’s strategy on a regular basis.
While the company’s strategy may not be assessed annually in detail, it certainly should be reviewed once per year. Prior to an assessment, many boards focus on goal-setting as a separate and distinct agenda item at a different meeting. This can ensure alignment with shareholders on long-term goals, objectives, mission and values and can help set the stage for first-principle thinking when later assessing strategy.
For many companies, and especially for many family businesses, there can be an emotional connection to certain business units, markets and products. Frequently, the management team and nonindependent directors know these are problematic areas, yet calling them out is still challenging. Independent directors need to be the ones to question legacy business units, and are in a unique position to do so. They are close enough to the business to understand the opportunities and risks yet, given the boundaries between board oversight and managerial prerogative, are not as wedded to sacred cows.
Drafting an activist letter is one of many approaches. Many boards bring in experts or consultants to initiate an assessment, sometimes at an off-site, which can help the board become more conversant in the landscape as well as many of the opportunities and challenges facing the company. This can be particularly helpful for the impact of new technologies, including AI and cybersecurity best practices. Having fresh eyes provide an outside-in look can be helpful in getting an inside-out look.
While one of many approaches to assess strategy, our activist letter also provided a good way to ensure accountability. If the next time we draft one, the only thing that changes in the letter is the date, it’s an obvious red flag that we still have work to do.
Bill Rock is president and CEO of MLR Media.