What to Say When Launching a Strategic Review Process

First published on the Harvard Law School Forum on Corporate Governance, here.

A chaotic energy filled the halls of an S&P 500 company. The head of HR was managing a flood of employees in her office with questions about how their benefits could be impacted if the company is sold. Meanwhile, the company’s head of communications was busy fielding reporter inquiries from Bloomberg and other media outlets, while down the hall, the CEO was on the phone with frustrated clients. In the ensuing weeks, HR noticed an uptick in employee attrition and difficulties recruiting talent.

The company’s clients and employees were reacting to an announcement that its board of directors would “review strategic alternatives, including a potential sale of the company.” They were understandably concerned about the implications for them. Like many boards and management teams, the company’s leadership had failed to anticipate how disruptive such an announcement can be. Had they planned appropriately, they would not have been caught so flatfooted.

Below, we review challenges that publicly announcing a strategic review can create. We then outline communications practices for addressing these obstacles.

With pressure on boards to run strategic reviews, boards and management teams should carefully consider the implications of publicly disclosing a process.
Pressure to disclose a strategic review often comes from activist shareholders. While a muted M&A market in late 2022 and early 2023 may have caused some activists to shift their focus elsewhere, many market observers believe this lull will be temporary. According to Morgan Stanley, “The growth in the private equity industry, sophistication of corporate clients and overall strength of corporate balance sheets and earnings should result in increased M&A activity in 2023 and beyond.” [1] Given a potential uptick in M&A, increased levels of shareholder activism, and valuations resetting, many companies can expect pressure to sell themselves.

Boards that decide to run a process face a foundational decision: Should they publicly disclose it? Research from Jenny Zha Giedt at the George Washington University School of Business outlines the potential benefits and risks of these announcements. The research validates what we see in our advisory work: While the announcement of a strategic review can lead to a more robust process and higher premiums, it also often brings negative consequences for a company and for shareholder value.[2] These consequences, outlined below, are significant enough that most financial advisors recommend against disclosure in most circumstances.

What’s at stake when announcing a strategic review?
The risks of disclosing a strategic review go beyond the negative attention and share price impact if the process does not yield a sale. The perception of putting up a “for sale” sign often creates less obvious issues:

• A public process consumes substantial time from directors and management, distracting them from overseeing and running the business.
• The company may face challenges retaining and recruiting employees.
• Relatedly, productivity can suffer as employees worry about things like job security and whether they’ll have to relocate in the event of a sale.
• Other stakeholders including customers, especially those with long-term contracts, often have concerns about how a sales process could affect them.
• Competitors may capitalize on the perceived instability following the announcement, costing you market share.

After the announcement of a strategic review, a company can say little about the ongoing process. What’s the point of communicating with stakeholders if you can’t tell them anything of substance?
The suggestion that a company can mitigate the above risks with multi-stakeholder communications will surprise many who have been involved in these situations, given the legal and practical restrictions on what companies can say. This attitude ignores the nuances of these announcements as well as important dynamics around stakeholder communications.

For example, even when employee communications can say little about the process, the fact that management is reaching out, in and of itself, shows that leadership is thinking of them and promotes the perception of transparency. This supports employee morale. Additionally, as noted below, there are things the company can say and do in these situations to reduce uncertainty.

A company’s announcement of a strategic review has parallels with the onset of a reputational crisis. In a crisis’ early stages, stakeholder uncertainty is heightened, and companies have few facts to provide as they seek to understand and respond to the situation while limiting litigation risk. Best practices nonetheless call for frequent leadership communications and engagement.[3] Why then, when a strategic review announcement creates turmoil for employees and others, should companies ignore the need for stakeholder communications until damage is done?

Best communications practices for announcing a strategic review process
Below are recommendations for companies choosing to disclose a strategic review. Some boards will decide that a public disclosure is beneficial at the start of the process. Others will choose to acknowledge a strategic review once news of it has leaked, and/or they are facing activist pressure. The following recommendations apply in either situation.

1. Identify likely stakeholder concerns pre-announcement and prepare a detailed and prioritized outreach plan to address them to the extent possible.
   When planning for the announcement, carefully consider the potential reactions of your key audiences. This thought process can help answer important questions, such as, which clients warrant outreach to apprise them of the announcement, and from whom?
   
   When considering who to alert directly about the news, review existing practices. If you never share corporate news with vendors, for example, the announcement of a strategic review may not be the best time to begin. Instead, be ready to answer their likely questions.
    
2. Acknowledge and place bounds on uncertainty.
   Conveying certainty where none exists can damage credibility. Following the announcement of a strategic review, management teams should get comfortable admitting that they don’t know when or how the process will end.
   
   Companies can reduce rumors, especially among employees, by placing bounds on the uncertainty. For example, the announcement should articulate what the board is considering, such as joint-ventures, divestitures, and/or a sale of the company.
   
   Messaging should acknowledge the possibility of remaining a standalone company, which manages expectations and helps reinforce a “business as usual” mindset. Relatedly, management should avoid speculating about potential outcomes or details of the process in its communications or interactions.
    
3. Ensure consistency of messages when tailoring communications for various stakeholders. 

   While it’s tempting for executives to provide differing messages to Wall Street and employees, inconsistencies will hurt managers’ credibility. For example, if the company press release notes that a sale is a potential outcome of the process, don’t downplay the possibility with employees.

   Communications should nonetheless emphasize and expound upon points relevant to the target audience.
    

4. Communicate with employees frequently and empower people managers.
   While you can say little, employees appreciate the act of reaching out and acknowledging their concerns. Remember, however, that internal communications frequently become public. Listen to your legal counsel, and avoid risky tactics like employee town halls with open Q&A.

   When considering how to best communicate with employees, T. Larkin and Sandar Larkin’s decades-long research on employee communications during company transformations and periods of uncertainty offers helpful insights.[4] Among the most important points for companies announcing a strategic review is the value of using frontline/people managers as information resources for employees. You can empower them in this role by providing incremental information and talking points to address questions.

   Leadership communications to, and interactions with, employees should convey a “business as usual” message. Remember that employee scrutiny of leadership communications and behavior will increase post-announcement.
    

5. Thoughtfully manage press leaks.
   Expect inquiries from reporters immediately after the announcement, even if your company rarely appears in the news. The media loves a good M&A sale process.

   While it’s best to adopt a general policy not to comment on rumors to avoid setting a precedent with reporters, companies sometimes benefit from speaking with an inquiring reporter on background, i.e., not for attribution, to gather intelligence, shape a potential story, and prevent the spread of misinformation. This may include situations where the reporter is speaking with a self-interested bidder. 
    

6. Maintain communications with Wall Street.
   A strategic review is not an excuse to stop communicating with shareholders. Most publicly announced reviews don’t end in a sale, so keep in touch with your shareholder by continuing most routine IR activities.[5] In limited situations, you may even consider talking to “arb investors” (carefully) to hear their point of view on the process and perceived obstacles to completion. In all conversations, be prepared to quickly pivot away from questions about the process.

When announcing a strategic review, carefully consider your communications and IR strategy to protect shareholder value.
Boards planning to conduct strategic reviews should carefully consider the benefits and risks of public disclosure. Those deciding to announce a process will benefit from thoughtful communications planning, which can support employee productivity and retention and limit stakeholder distractions during an uncertain time for the company. Boards that fail to do so risk destroying shareholder value and make themselves vulnerable to activists.

Patrick Ryan, Senior Vice President, Edelman Smithfield

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Endnotes

1. Source: Morgan Stanley, 2023 M&A Outlook: 4 Trends to Watch as Deal-Making Accelerates (February 10, 2023). Available at: https://www.morganstanley.com/ideas/mergers-and-acquisitions-outlook-2023-trends
2. Source: Zha Giedt, Jenny, Economic Consequences of Announcing Strategic Alternatives (July 11, 2022). Available at SSRN: https://ssrn.com/abstract=2695287 or http://dx.doi.org/10.2139/ssrn.2695287
3. See, for example, Doorley, John, and Garcia, Helio Fred, “Crisis Communication” in Reputation Management, 3rd edition.
4. Larkin, T. and Larkin, Sandar, Communicating Change: Winning Employee Support for New Business Goals.
5. Source: Zha Giedt, Jenny, Economic Consequences of Announcing Strategic Alternatives (July 11, 2022). Available at SSRN: https://ssrn.com/abstract=2695287 or http://dx.doi.org/10.2139/ssrn.2695287