S3E10 - Kiley Rawlins from Ulta Beauty on How to Effectively Prepare For and Manage Shareholder Activism

Introduction to Activism Readiness

Mark Fasken: So Kiley, for better or worse, you've now been involved in a few activist situations, maybe not all campaigns, but situations. So, the first question I wanted to cover was about activism readiness as an IRO who's been through it a few times and has had the opportunity to reflect on those situations as well.

How should an IRO think about and approach activism readiness? 

Kiley Rawlins: Yeah, I think the most important thing to remember as you prepare for a potential activist campaign and prepare your team and prepare your board. Is that the processes, the situations are always going to be different.

It's an evolving process. 

Understanding Key Issues and Vulnerabilities

Kiley Rawlins: I think you start with understanding what are the key issues and considerations for your particular business and your particular category. So, as an example, I'm in consumer discretionary consumer, and several years ago, there was a focus, a lot of conversation around the role of e-commerce and whether or not e-commerce could be split off.

And so I think in that situation, we took a look at our business and said, okay, if someone approached us with this idea, how would we think about it? And so I think it's understanding where your vulnerabilities are as a category and what the hot topics are. And then I think also understanding your particular company’s risk.

And we can get into sort of the ways we evaluate that. But I think it's understanding, first, what's happening in the broader market, what's happening in your category, and then where, are you vulnerable? 

Building Relationships and Gathering Feedback

Kiley Rawlins: I think, broadly, it's important to just make sure that you are continuing to build relationships.

So that you have those relationships in place before you need them. And so I think, thinking about not just your active shareholders that you talk with all the time, but also your passive investors. And this can be part of your regular proxy engagement as well.

And I think, as you're talking to investors, it's important to get their feedback on, issues that are particularly for your category. So, going back to my example, talk to your investors. Hey, what do you think about this idea of splitting off e-commerce? Is it a valuable or a potentially value strategy.

So those are all things to think about. 

Communicating with the Board and Management Team

Kiley Rawlins: I think also you have to think about and make sure that you're communicating regularly with your board and management team. Again, when things come up in your category, make sure that you're sharing that with the board. Hey, this is what's happening.

We're watching it. This is what we're seeing. Just to keep them in the loop. And so I think those are all of the things that you, you know, as an IRO wanna think about as you're. Thinking about preparing for what could be a potential activist campaign. 

Mark Fasken: That's super helpful.

Frequency of Risk Discussions at the Board Level

Mark Fasken: And you mentioned this just briefly getting into, like, how do you talk about these things? How regularly do you talk about them? That's a question that I had for you. Is the first thing you mentioned of having a conversation about what are the potential risks? How often do you think companies should be talking about that at the board or management level?

Monitoring Performance and Comparing with Peer Groups

Kiley Rawlins: Yeah, so I'll share the approach that we take at Ulta Beauty. We report to the board formally twice a year. And so we are, in those reports, we are comparing Ulta Beauty across actually several different peer groups across a variety of metrics. And so we're looking at just broadly, we're looking at share performance.

How does our share performance compare to these peer groups? How do our valuation metrics compare to these peer groups? How do our profitability and growth to some of the operational metrics compare to the peer group? And from a peer group standpoint, I think what we're trying to do is look at, as I said, multiple peer groups.

So we have a look at those, in our case, those retailers who sell beauty. So, an operational peer group. But I think it's also important to understand who is your ISS peer group because, often, in an activist fight, not always, but often you are going to be compared to that ISS peer group.

And there may be folks in that group that you don't normally think of. For example, for us, Under Armour is in our ISS peer group. That is not a company that I would normally compare myself to. So, I think it's important to look at it from an operational lens, but also from an ISS standpoint. And so we're reporting that to the board formally again, twice a year, but informally, we're also looking at surveillance information again; if something unusual happens, we'll share that with the board as appropriate.

And so I think we have certainly a formal structure, but I think. Not all of the developments will happen in line with that calendar. And so I think making sure that you're keeping the board aware of what you are watching is helpful.

Mark Fasken: And as part of that, so twice a year, you report up to the board.

I'm sure it's amongst many other topics, but you're reporting on potential activist risks. So you might bring something like that up to say, I don't know, there's a couple of our peers who are trading at a different multiple, and they've all broken out e-commerce, and so maybe we should too. I'm just using an example that you used.

Preparing for Potential Activist Campaigns

Mark Fasken: Are you then also presenting possible solutions or talk tracks or explanations that you would then use if an activist situation was to arise, or is it we're going to wait until something comes up to think about a response? 

Kiley Rawlins: It's more the latter because, again, I think every situation is going to be nuanced and different, but I think it is important what you may not have a template for a response, right?

Because you don't know really what the question is going to be. But I think you have to understand and have in place who's your advisor team, right? Who are you going to pull in if something happens, right? And have that said again before you need it. So make sure, who's your legal advisor, who's the investment bank, who's your proxy solicitor, who's your comms advisor? These are all folks to have established before you need them. And so I think that. That's a critical part. 

Importance of Advisor Team and Scenario Planning

Kiley Rawlins: And then I think there are things that you can do with your board and with your management team to help think through the process, right?

Because you may not know what the question is, but you really should have a good sense of, okay, if this happens, who's going to take the call? How are we going to respond? What board member are we going to put up on to give them someone to connect with. And so I think thinking through all of these things is important.

And I think as much as I hate doing them, tabletop exercises are really helpful in this situation. Because it gives everyone, your board, your management team, it gives you a moment to think through. Okay. If this happens, we will do that. Then if this happens, we will do that.

And at least just having a practice session, even though you may not know what the exact scenario is that starts people, get people thinking, and you're not caught off guard if something actually happens. 

Mark Fasken: Yeah, that's great. 

Activist Preparedness Strategy

Mark Fasken: That, and you just touched on a bunch of really great points on our next question around activist preparedness.

And somebody's used this phrase of the glass box that you have to break with the hammer when there's a fire, you break it, and you pull the alarm. And that's really what the preparedness strategy is supposed to be about. If something goes wrong and everybody's not panicking and running in a bunch of different directions, I think to your point, it's about practicing it so that there is confidence so that when something happens, everybody knows what to do, and it's methodical and well thought out.

And so you talked about a couple of things there, which is making sure that you have all of your advisors and sort of partners lined up, you know who they are, you have the contact person, you have the relationships already in place, it's not like we just received a letter and suddenly we're trying to hire a communications firm not probably a good place to, to get in, probably super expensive if you want to do it that way.

But your point also, yeah. Who are we going to reach out to? Which board member is going to get involved? So those are all really great points. Was there anything else that we didn't touch on in the preparedness checklist? 

Kiley Rawlins: So, a couple of things. I think getting your advisor team together ahead of time and giving them an opportunity to engage with the board, whether it's through tabletop exercises or putting them in a position to give the board an update on what's happening in the overall market.

What kind of campaigns are we seeing, but giving them an opportunity to start to get to know your team and your board so that they can be effective advisors. And I think that my helpful tip is to make sure that you have advisors that you are ready to be in the trenches with, right?

Because when you are in the middle of a campaign, it's not a 40-hour, eight-to-five situation. And I think knowing that you are, who you're working with, and they understand your team and the dynamics and your culture is already all really important. I think also remember that it's not just about investors.

Customers can be impacted. Employees can be impacted, right? And so making sure that you have connections with your PR team with your employee communications team to make sure they're also in the loop as we think about scenario planning and tabletop exercises. Because I think, again, whatever you're sharing with the outside world with investors in response, et cetera, is going to impact other constituencies that you deal with.

And so I think making sure that you're all aligned and prepared for that is really important. 

Mark Fasken: It's a really great point. And you're right. I don't think people talk a lot or maybe enough about communication with customers, but also employees, and I'll use a personal example. Actually, a very good friend of mine works at Shopify, talking about e-commerce.

They've had a few situations over the last couple of years where activists have come out and put out letters, reports, and whatnot. From the outside looking in, I've always thought, hey, that probably really is upsetting for him. And I've talked to him about a few times, and he said, you know what, actually Shopify has done a great job explaining what's going on and why it's happening and why that group is right or wrong or whatever.

And he's, it hasn't knocked his confidence at all. And I feel like that's. Probably something that some companies may forget about, right? You've probably got a whole bunch of employees sitting there going, Ooh, is there actually something wrong right now that I should be worried about? 

Kiley Rawlins: And the reason to engage and make sure that your employees are in the loop is twofold, right?

One, you want to reassure them, right? That, that, here's the situation, here's the strategy, here's what's happening, right? So that they have visibility to it, but you also want to make sure. They're on the same page, right? I think the other when you are engaged in an activist situation, anything you say, anything you write, anything you send is fair game.

And so I think helping keep your employees informed and reminding them that we about not sharing non-public information or confidential information, et cetera is a great opportunity to work that in through the communications process.

Mark Fasken: Great. That's super helpful. 

Identifying Company Characteristics that Attract Activism

Mark Fasken: And so, coming to our next question, talking about certain characteristics that may put companies at risk of activism. I know it varies widely by sector and everything. At the end of the day, a lot of the time, it just comes down to valuation and in dollars, but there are certainly some company characteristics that the company should be watching out for, any recommendations on certain metrics that companies should be keeping a really close eye on regardless of Sector?.

Kiley Rawlins: Certainly stock performance, right? And I think looking at the company's stock performance over time, because generally, my experience has been an activist, doesn't come in if you underperform your peers or index for 30 days. Or six months, right? It is a prolonged period of underperformance. And so make sure that you're not just looking at the last year but that you're looking at the last year, the last three years, the last five years you're tracking that. So certainly, stock valuation and shareholder returns is a key metric. Again, I think operational metrics, right?

Again, thinking about profitability, profit growth, asset utilization, ROIC, how do you compare with your peers? Again, over time. Because certainly the pandemic created a lot of disruption, and everybody's numbers went wacky for a little bit. I think you have to, again, think about it over time, but I think even beyond just the financial.

I think look at your corporate governance metrics, right? How is your board structured, right? Do you have a classified board? Do you have a staggered board? What's the composition of your board? What's the tenure of your board? What's your refreshment strategy?

And yes, I think you have to look absolutely at the numbers. But I think you also work with your GC to understand your governance practices and policies, and strategies. And then I think the 3rd sort of area to track, think about, is management performance and credibility, right?

I think you have to assess your team's credibility again versus other peers versus other folks in the sector because that will come into play in a hostile situation. And so understanding that and being candid with your team about that is important. 

Engaging with Activists and Shareholders

Mark Fasken: And so taking some of these metrics into mind, let's say you're in a situation where you find that there's an activist who's perhaps taking a position, cause that seems to be at times the starting point.

But, I won't print the question too much; at what point do you, and maybe would you recommend to others, inform the management team that there is an activist in the mix in some way? 

Kiley Rawlins: So I'd say my closest partners are my, of course, my CFO, but also my general counsel. And so I think whenever there's something that just feels funny or looks funny or smells funny, or you're just like, this is weird, I elevate it to the CFO and the, and my GC, I, and I will preface it by saying this could be nothing. But this is what I'm seeing. And my rule of thumb is, if I don't say something and it escalates, I wish I had, okay, hindsight is 20/20, and I think then working with the GC and CFO to say, okay, when do we pull in the CEO?

When do we pull in the board? Again, I think the judgment call, the rule of thumb, is if something were to surface in 30 days or 60 days and we didn't share what we were seeing now, would we have regretted it? And so I think that's how we think about keeping our board informed and keeping our team informed.

And again, it could be right, but then it could be something. 

Mark Fasken: It's a good strategy because it means that you have a group that you can go and speak to about it without it seeming like you're sounding the alarm for nothing. I don't think that. Hopefully, there's nobody listening that's like, let me send to 15 people on the board and management team every time something smells a little funky, but that's probably a good way of doing that.

If all 3 of you are saying, yeah, this looks like it could be a problem, then you can escalate it, and you feel like you've got a bit of a working group. So I think that's a great way of approaching it. We talked about this a little bit already. Yeah. 

Monitoring Activist Campaigns Among Peers

Mark Fasken: Looking at peers, right? Obviously, there's a lot of peer comparison around ownership and share price performance and everything.

How important is it, or how actively are you monitoring activist campaigns amongst your peers? Maybe that's direct peers or maybe peers that aren't so direct, Under Armour in the ISS case. And how would you recommend IROs go about collecting that information monitoring it without too much of a heavy lift?

Kiley Rawlins: So, I will say I monitor what's happening with our peers much more closely than the broader market. But I think there are certainly, again, thinking about your advisor group, they can help give you visibility to what's happening in the broader market.

I monitor what's happening with our peers with tools like FactSet or AlphaSense, looking for SEC filings, of course, but also news articles because sometimes that will be the first sign. And I think the, again, leaning on your advisors.

So whether it's your investment bank, or your comms advisor, your proxy solicitor, they can, because they’re involved in so many different situations, they can help you and your board and your team identify what the trends are, what's evolving, what's emerging, and where you think your risks are.

I use a combination of leaning on my advisor group but also watching and setting up alerts to make sure that I'm aware of what's happening, particularly within my peer group. Whether there's a 13D filing or, again, just other news articles that can come out.

Mark Fasken: And you choose to do just the peer group, not the broader market, I'm assuming, because it's broader markets, possibly just too large. And there's too many signals that may just be nothing and it becomes a bit of a fool's errand. Is that a fair assumption? 

Kiley Rawlins: There's there are only so many hours in the day, and there's other things that I need to do other than monitor for activism.

But I think I also try to, particularly for some of those larger, more notable activist firms, right? Tracking campaigns, just this. Keeping an eye out on what's happening, right? So whether it's Trian and Disney, which is going on, or other firms that, again, tend to engage with activist campaigns, just making sure that I'm just aware of what's happening.

I may not be reading the filings as closely as I do if it's a peer, but I do try to stay aware of what's happening in the broader market. 

Mark Fasken: Activism obviously has some negative connotations I would say maybe more so just in the IR community because the IROs tend to be the ones who have to deal with the brunt of it.

So it's not always like a fun activity. But it can also Be positive for certain stakeholders, right? It can be positive for the company. It can be positive for shareholders and employees, I'm sure as well. Fresh ideas can come out. You could have new strategies and different ways of doing things that can arise from activists.

But they can also create a lot of conflict and confusion and all sorts of other things. 

Balancing Threats and Opportunities from Activism

Mark Fasken: And so I'm curious just in from your experience, and maybe looking at other campaigns you've seen come up some examples of times when activists were posing threats and opportunities, where you decided to engage and have that conversation and kind of work with them, or situations where you were just like, this is not worth our time and Maybe resist or push back a little bit more. 

Kiley Rawlins: I don't know if there's really a winning solution to not engaging, right? I think I think that creates more risk, and ultimately, I think has the potential to become hostile pretty quickly. So my advice would be always engage. And I think that it's useful for a couple of things.

One, it helps you understand what is their interest? What is the tone? Are they friendly? Are they more constructive? I think in the situations I've been in, we've had some time, right? It's not that I woke up one morning, and there was a 13D filing, right? We had a contact, somebody reached out, it gave us an opportunity to have a conversation, several conversations, to understand their point of view and their position, so I don't think it's a question of whether or not to engage, but I think the question is, how do you engage. Who engages, and what's the communication strategy? Is it a listen strategy where you're listening to the ideas and the position?

Is it more collaborative or constructive than that? But I think it's hard to know what the right strategy is until you have that first conversation until you engage with them. Ultimately, I think the decision is made by the board and the CEO, right? With input, of course, from IR and the advisors.

But I think that those first few, interactions and engagements can have a pretty big impact on the tenor of that campaign. And so I think to the extent that you can avoid it becoming hostile, you're better off, your team's better off. Hostile situations can be a distraction, for the team, for your employees, for your customers. And so I think ultimately, you want to try to avoid that. Sometimes, you can't. But I think approaching the initial outreach with with an intent to engage is probably the best way to go.

Mark Fasken: Great. And you mentioned say 13D comes out. Everybody knows it. Shareholders know it and everything. So I assume in that case you pretty quickly need to start engaging with shareholders and having conversations about what's going on prior to that, though. You mentioned there are often opportunities where you're meeting with these groups, whether it's a conferences or through conference calls, whatever it is, and there may be expressing concerns or whatever.

Are there situations where you ever would speak to shareholders? In that situation where you're having these active conversations, and maybe you Want to get the perspective of an investor to say talking to this group who's expressing some concerns? What do you think of that or is it like we don't ever talk to shareholders until 13D comes out?

Kiley Rawlins: I think going back to one of my earlier comments, is I think you always want to solicit feedback from your shareholders. I'm not sure you'd want to suggest that there was an activist sort of pushing, but I think if you have understand what the concern is, or what the issues are, I think you absolutely should try and get a sense from your largest shareholder their viewpoint because I think that will help define or certainly impact your strategy as you think about an engagement.

And so I think, again, soliciting feedback from your shareholders is an important part of the process, right? And sharing that with your team and your board is critical. 

Final Advice on Dealing with Activism

Mark Fasken: Our final question: there's been so many good points here. Any final pieces of advice? I'm sure that there are IROs who are listening to this that have never been in an activist situation.

To your point, it's a lot of other things that people are doing in their daily lives as an IRO. This is just one piece of it, but an important piece. Any suggestions for IROs who are listening to, you talked about lessening the chances of having an activist investor or just ensuring that those engagements are positive in some way, that they're productive, is maybe the best word to use.

Kiley Rawlins: I think, ultimately, the best way to avoid an activist situation is to deliver strong shareholder returns. To maintain transparency and, credibility, and strong relationships with your shareholders. Again, we talked a lot about soliciting feedback. That you can then share with the board and the team. I think for IRO, understanding the process is really helpful because I think, there, there's certainly, you can get a sense of what happens, in the filings and in the media report, but I think working with your advisors to understand, okay. What's the first thing that usually happens? In my situation, we've gotten calls from activists ahead of time to say, hey, we intend to file a 13D, but we want to talk to you about it. This is our position. Can we grab some time? It's not quite as nice as that, but it was. But the intent was there, right? So you had an opportunity to again, begin that engagement.

 So, understand the process. What are the filings? What are the requirements? Again, working with your GC and board to understand, okay, what are the steps we're going to take? If we get that call, if we get that email, who's going to talk to the activist. When, generally, when investors call and say, we'd like time with your CEO, we think about the strategic benefit of that.

It's a different lens if it's an activist firm, so I think you have to understand that as an IRO. And again, think about the process and just make sure that you and your team have at least a “here's what we're going to do on day one if this happens.”

Mark Fasken: Great. 

Conclusion

Mark Fasken: Kiley. Thanks so much. Tons of great points in here. I really appreciate your time and your expertise. 

Kiley Rawlins: Well, thank you, Mark for that question. This is a topic that I think a lot of IROs think about, and I really appreciate you hosting me today and giving me an opportunity to share some of my experiences, and some of the ways that I think about it. So, I really appreciate you hosting this podcast today.

Thanks, Kiley. Thank you.