The rapid growth and influence of activist investors has many executives nervously looking over their shoulders. Even large companies are increasingly vulnerable (Exhibit 1). But there is a benefit to be had by those managers with the courage to take as hard a look at their own company’s performance as a performance-minded outsider might. The objective isn’t necessarily for managers to do what activists would do—activists’ performance is mixed, after all (Exhibit 2). Instead, the goal is for managers to examine their own strategy, governance, and operations with an eye to unearthing opportunities to improve performance.
Doing so, of course, requires acknowledging vulnerability. Managers, like all good leaders, are often successful because once they’ve made a strategic decision, they commit themselves psychologically to following through. Even those who invite dissent to challenge unconscious bias expect dissenters to fall in line once a decision is made. And in the absence of an occasional external point of view, that singular commitment can blind executives and board directors to opportunities as their company, the industry, and the economy around them change.
Shining light on those blind spots also requires more than just a typical strategy review. In our experience, that’s where an activist role play can help. Managers give participants in such exercises (often called a “red team”) deliberate license to challenge their thinking across the board, including strategy, performance, governance, and even compensation, with no holds barred. That’s the kind of exercise that many activists do when targeting prospective companies. For those who successfully emulate activist thinking, the opportunity can be striking: top-quartile activist campaigns are associated with sustained excess total returns to shareholders of more than 9 percent even three years out. It can also better prepare managers, who seldom prevail in disputes with activists (Exhibit 3), to better respond to their overtures.
