FCR examines the latest trends in shareholder activism, including the emerging threat of sophisticated offshore activists, and how companies can be prepared.
Company boards and management have learned to expect needling by small shareholders, the Australian Shareholders Association, or a disgruntled institutional holder, or being hit by short selling from local hedge funds. Now they need to heed signs of increasing activity by international predatory investors.
When US hedge fund, Elliott Associates, looked to boost the value of its shareholding in BHP by demanding the company hive off its petroleum assets, scrap its dual-listed structure and delist from the ASX, it was another indication the biggest international activist shareholders have Australian companies in their sights.
At the other end of the scale among smaller stocks, US activist investor Glaucus launched a criticism of ASX traded sandalwood producer TFS (now Quintis) earlier this year that drove the stock price sharply lower.
So, while Dealogic’s records show merger and acquisition activity last quarter was the quietist since 2013, hedge funds, opportunist short sellers and activists are gaining greater attention for their surprise tactics. Instead of aiming to take a company over, short sellers agitate to force share prices lower, or activists with long positions initiate campaigns to boost share prices by unseating the board or forcing corporate change.
Large international short sellers and activist funds, such as Meridian Investment Management, Laxey Partners and Carousel Capital of the UK and Glaucus, Gotham, Weiss and Muddy Water of the US, have started showing interest in Australian corporate equities and listed investment companies and funds. Some have started appearing on local registers during the past five years, quietly building their stakes.
Ironically, the fact that our legislature supports the rights of all shareholders, and does this to a greater extent than in some other countries, helps encourage international groups to bring their well-honed activist techniques to Australia.
International trends also play a part in importing threats to local companies, with some sectors feeling greater heat than others. The coal mining sector is losing investor support globally as investment funds with a long-term view sell down their fossil fuel stocks and switch to renewables for better long term growth. Short sellers can be expected to pile on and exacerbate such trends.
Trend changes often have a ripple effect, illustrated by the horde of anti-coal protestors from 13 environmental groups which descended on Westpac’s 200th anniversary celebrations in Sydney recently. The protestors warned they would continue to target Westpac to deter it from helping fund the controversial Adani coalmine in Queensland’s Galilee Basin. Festivities were held up for 90 minutes while police unchained a protestor from a metal post inside the event.
Any group with a grievance can become a thorn in the side of company directors. Last year the operator of local Westfield centres, Scentre Group, had to confront representatives of the cleaners’ union at the shareholders’ annual meeting who complained about cleaners’ low rates of pay. There were no grievances at this year’s Scentre meeting.
The recent battle for board control of listed investment company, Contango MicroCap, and the board spill at Praemium Limited remind us that disrupting elements can come from closer to home. In Contango MicroCap’s case the push for boardroom change came from its incumbent asset manager, Contango Asset Management. With Praemium the board was rolled by shareholders holding 17.3 per cent of the company’s shares. They requisitioned a meeting and succeeding in replacing four incumbent directors with three of their nominees.
Private equity groups who appear on your share register can agitate for changes to the company’s growth strategy, corporate structure or operations as a way to increase the value of their holding. Usually, though, they are agents for more severe change, aiming to take over and dismember the company for gain, as the TPG consortium’s bid for Fairfax indicates.
Boards monitoring their share registers for the first signs of potential activist build-up would do well to be further prepared before the warning signals appear. This can include tracking concerns of major shareholders, investment analysts, proxy advisers and small shareholders to develop appropriate action plans if criticism is building. Or it may require better communication to explain the logic of the company’s growth model, long term strategy or future development plans, if there is misunderstanding or lack of credibility surrounding these aspects.
Either way, continuous two-way communication is just as important as continuous disclosure, if not more so, to avoid becoming an activist target.
Activism rises as shareholder engagement wanes
In the past five years annual meeting attendance has fallen by 14 per cent and the numbers voting have dropped by 24 per cent, according to Computershare figures. It’s apparent that corporate engagement with shareholders is falling. So the chances of an activist tilting against an establishment board and succeeding are getting better year by year as shareholder engagement wanes.
Communication is at the heart of shareholder engagement and over the past decade communication with shareholders has changed. Companies have urged shareholders to go online to gain their corporate information. Remembering passwords and filling out forms hasn’t exactly encouraged greater communication.
Similarly, the move to opt-in annual report mailings – designed to reduce corporate costs – has choked what was an important channel of communication with the majority of shareholders. Many now don’t bother to trawl online for reports when previously they had only to open an envelope.
On the other hand, companies can contact each shareholder through email and the enlightened CEOs have taken advantage of technology to offer video webcasts that speak directly to all interested investors at results time.
CEOs, CFOs and investor relations managers of many companies have tended to focus more on keeping analysts, major shareholders and their advisers informed, forgetting to pay the same attention to small shareholders. The results are reflected in the fall in AGM attendance and voting.
As more shareholders become disengaged with the companies in which they invest they no longer have the same loyalty and pride in what they once regarded as ‘their’ companies. In this way, companies risk losing their individual character to become little more than commodities to be traded for short-term gain. As this happens, shareholders are more likely to side with the rising tide of activists.
….unless companies pay close attention to how they communicate with their shareholders.
In this regard, gaining independent outside advice from an investor relations firm with specialist communication expertise can help improve dialogue with various investor groups and influencers.
For example, a company may need to convert one-way asymmetrical messaging into the more rewarding two-way symmetrical discourse required to resolve conflicting points of view. Advocated by communication pioneers Jim Grunig and Todd Hunt in their ground-breaking 1985 book, ‘Managing Public Relations’, this approach regards communication as enlightened discussion and mediation instead of persuasion. Implemented properly, it can help uncover emerging issues among a company’s stakeholder groups, and resolve them before they become an intractable basis for activism.
By Brian Mahoney