One area of qualitative characteristics that Standard & Poor’s evaluates in its ratings process is the actions and attributes of a company’s management team and board of directors.  The analysis of those individuals charged with governance offers S&P valuable information about the nature of the subject company and its leadership that could impact the company’s overall risk profile and creditworthiness.  In a July 2013 article issued by Standard & Poor’s Ratings Services, the credit rating agency discusses a particular feature of its analysis of management and governance – consideration of the impact of activist investors on a company’s leadership team and board of directors.

S&P notes that today’s activist investors are often highly sophisticated and can thus be extremely influential, even when they don’t hold a substantial stake in a company.  Investor activism can lead a company’s leadership to question its decision-making process and even change course in some circumstances.  This unique interaction between investors, management, and the board of directors offers S&P the opportunity to see corporate leaders under pressure.

From a risk management perspective, this article reveals several points to consider:

  1. Stakeholder groups are interested in the way a management team and board of directors evaluate risks and make decisions.  As shown by the article, S&P is an example of a stakeholder that uses investor activism scenarios as a means to qualitatively evaluate a company’s decision-makers and its decision-making processes; that evaluation ultimately impacts S&P’s overall decisions about the risks surrounding a particular company.
  1. Investor activism is a potential risk event for any organization to consider as a part of its own risk universe. 
  1. Organizations that hold their own portfolio of investments may find it beneficial to monitor investor activity at company’s in which they hold stock.  That type of information could serve as a risk indicator in one area of the overall risk management process.

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Link: Standard & Poor’s Ratings Services

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ERM Enterprise Risk Management Initiative 2013-07-01