This interview originally appeared on the Family Business/Business Family podcast. Don’t miss an episode! Follow Family Business/Business Family on Apple Podcasts, Spotify, Amazon Music or wherever you listen to podcasts.
When most business leaders hear the phrase “activist investor,” their reaction isn’t usually positive. They picture outsiders pressuring boards, demanding cost cuts and threatening proxy battles. But Tony Brausen, a seasoned board director and C-suite veteran, argues there’s real value in borrowing from the activist playbook — before outsiders show up.
“The main thing here is not to wait until you’ve got an investor activist pushing you,” Brausen explains. “It’s really saying, ‘Before that happens, let’s assess the vulnerabilities that we may have as an organization that would attract activist investors and let’s address those issues.’”
Common Vulnerabilities Every Board Should Assess
Brausen highlights several red flags activist investors often seize upon:
- Lazy balance sheets. Too much idle cash or an all-equity capital structure can drag down returns. Cash sitting in low-yield accounts is a “value-destroying asset,” he says. Introducing the right amount of debt can lower a company’s overall cost of capital.
- Underperforming units. Businesses or geographies failing to cover their cost of capital must either be fixed or divested.
- High cost structures. Activists benchmark companies against peers. If expenses are out of line, they’ll push for reductions.
- Disparate businesses. Companies that straddle unrelated sectors often find their higher-value units undervalued by association. Spinoffs or divestitures can unlock value.
“Assessing these vulnerabilities and fixing these issues will create value for shareholders,” Brausen says.
Why It Matters for Family Businesses
Public companies face the real threat of activists. Family businesses typically don’t, but Brausen says the same self-assessment discipline should apply.
“As a board and a management team, we have among our top two responsibilities to create shareholder value and ensure the sustainability of the organization,” he says.
By stress-testing the business, family boards can spot vulnerabilities before they become crises. “It’s about building accountability into your governance,” Brausen adds.
Shifting the Mindset
Convincing family owners to go looking for “problems” can be tricky. But Brausen advocates for reframing the conversation. “They’re not problems — they’re opportunities,” he says. “If you identify a high cost structure and can improve it, that’s a value enhancer. How could we walk away from that?”
Equally important is changing perceptions about activists themselves. While headlines often paint them as hostile, Brausen notes that many activists work constructively behind the scenes. “The reality of it is, some of them are quite good and they actually do lead to shareholder value creation in many companies,” he notes.
When conducting a similar self-assessment of the business, Brausen explains that boards can either lead the process or enlist outside advisors such as investment bankers to provide independent benchmarking.
Once areas of improvement are identified, the company can work on a plan of action, Brausen says. “Now that I know I’ve got some of these vulnerabilities, let’s address them head on and build them into our strategic planning process and fix them.”