Activist investors: Welcomed liberators or unwanted pests?
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The word activist would make you think of the world of politics rather than the share market.
At least since 2014 when the Abbott government removed a loophole in the Corporations Act that had allowed GetUp to call a requisitioning meeting at Woolworths, needing only 100 members to trigger one. Now you need 5 per cent of shareholders to agree.
But while shareholder activism is consequently harder to undertake (in theory), it is not impossible. In fact many activist investors are professionals with billions of dollars to invest in takeover targets and should they succeed, make changes.
One example was Ron Brierley who had a 58-year career before retiring a fortnight ago. He departed promising that Sandon Capital Investments (ASX: SNC), the firm that would acquire his own Mercantile Investment Company (ASX: MVT), would continue in his footsteps.
Shareholder activism is Australia is less rampant than in the US, but it is increasing.
Canadian corporate governance practitioner David Beatty said last year: “We are now seeing activists work together or with pension funds to mobilise trillions of dollars of previously passive capital.”
“Investors want to know a lot from the board about the organisation’s governance and strategy, and will take action if they’re unhappy.”
Increasingly activism occurs for a wider variety of reasons, not just due to a business’ finances.
Here is what you need to know about shareholder activism.
To put it simply, they want change at the company. This often involves overthrowing the board so they can achieve what they want. Commonly they are fund managers and institutional investors, but sometimes they can be ordinary shareholders who have mobilised.
In rare instances they can be disgruntled ex-managers. Ex-Smiles Inclusives’ (ASX: SIL) bosses David Herilhy and Mike Timoney tried to overthrow the board that axed them but were unsuccessful.
But no matter who they are, activists will portray themselves as heroes, here to save the company.
One recent case was chocolatier Yowie (ASX: YOW) which became a target of Keybridge Capital after several quarters of losses.
Keybridge argued Yowie couldn’t be profitable unless changes were made – changes that wouldn’t happen under the current board. Keybridge havs since abandoned its takeover offer but only two weeks ago launched a requisitioning notice.
But recently shareholder activism has occurred for other reasons. The AICD’s general manager of advocacy Louise Petschler told Stockhead: “We have seen shareholder activism on issues including climate change, diversity and remuneration practices.”
“Clearly expectations of boards are rising and it is incumbent on directors to listen to diverse perspectives.”
Recent cases suggest activists may eventually go away if you either ignore them or take them head on. While Smiles Inclusive has financial problems, it is hard to find a recently dismissed CEO compelling.
Another recent case of failed activism occurred at Yellow Brick Road (ASX: YBR), which became a target of Brierley last year. Unlike Yowie, the company took them on – Mark Bouris declared the offer to be “grossly inadequate” and that shareholders would be worse off if they accepted Brierley’s offer.
But like Yowie, nothing came of the offer.
Aurora has also made a bid for Yowie but the board’s only response has been to tell its own shareholders to not listen to them.
Gilbert & Tobin’s most recent shareholder activism report found that successful activist investors were in the minority. Only in 46.5 per cent of cases in the first six months of 2018 were claims resolved at least partially.
Of course, just because you deal with an activist it does not mean substantial change will happen. Many would argue since Elliot Management’s snipes at BHP, the large miner has changed little other than dropping ‘Billiton’ from its name and running its “Think Big” campaign.
But in an era of “ethical investing” it is possible if the activists’ concerns are dismissed they won’t be the only ones out the door, and that might be the least of the board’s worries.
Louise Petschler suggested to Stockhead that boards facing issues raised by investors “should attempt to take a consultative approach and understand what challenges and opportunities their organisation faces”.
The AICD told its members last year the typical chair of an ASX 200 company “might have 20 to 30 meetings with investors and intermediaries in the lead up to its [AGM]”.
While small caps tend to have less major institutional investors (and even then typically in a custodian capacity), they are just as subject to disclosure laws as their larger peers. They will also undertake investor roadshows, occasionally even if they are not raising capital.
The AICD have also warned members that boardroom issues could easily spill into the courts.
Evidently, if it’s just a matter of a business’ finances, activists are less likely to be successful. You cannot be certain a different board could do anything better.
But if there are structural or legal issues with the company, activists can only be ignored for so long. In an era where it takes at least 5 per cent of shareholders to call for an EGM, as opposed to 100 members, it is far more difficult to label them as “pests” – even if “hero” is just as poor a label.