Shareholder Activism: a disruptive investment strategy growing in popularity

Activist investing is becoming increasingly popular as an investment strategy, driven by constrained top line growth prospects, challenged financial targets, and fear of value destroying mergers & acquisitions.

Investor activism is a strategy where an investor purchases an equity stake in a company, then pushes for change within the business with a view to unlocking perceived value. Activist investors often harness not only their direct voting stake in the business, but also the media, other significant investors and director relationships to pressure the board and management to agree to their demands. Given the disruption an investor campaign can cause, and the sometimes significant demands of activists, this can be a significant risk to a company and boards need to be aware of common activist triggers and how to deter activist attack.

According to S&P Capital IQ assets under management of activist hedge funds in the US have grown from around US$47bn in 2010 to US$125bn in 2015, which represents a compound annual growth rate of 22 percent. This is a significant amount of both capital value and potentially disruptive activist activity.

In Australia, shareholders owning more than 5 percent of a company’s shares are able to call general meetings and propose resolutions including moves to remove directors. This potentially gives them a very effective channel for disruption.

Activists are more inclined to strike companies:

  • Where there is a perception of a lack of capital discipline.
  • Which have underperformed relative to peers on one or more of a variety of financial, operational, and/or strategic metrics.
  • Which are perceived to be worth more broken-up than as a merged entity.
  • Where the long-term strategy is perceived to be sub-optimal for investors, especially in relation to M&A transactions.

Importantly, activist investors are receiving growing support from traditional investors, and are frequently supported by proxy advisors. The usual activist suspects of hedge funds and institutional shareholders are being joined by superannuation funds and other shareholders that are stepping up their engagement with companies.

Statistics show that between half and three quarters of activist demands are either met in whole, or when a compromise is reached. The success rate is much higher, possibly over 70 percent if campaigns where at least one demand was achieved are considered. And this has not shown any signs of slowing in the past five years.

This makes them a powerful group, who are often quick to mobilise and use agile social media platforms like Twitter to get their message out to large audiences, way beyond the usual shareholder group email. According to Global Proxy Solicitation, a proxy and advisory firm, Australia saw a record number of board spills in January 2014 (eight) and over 230 companies, including Qantas, Fairfax Media and Brickworks saw “public actions” taken against them resulting in changes to strategies and/or governance.[1]

Activist investing is often driven strongly held opinions, fuelled by perception. This is both a danger and an opportunity. The danger is clearly apparent in an activist’s power to influence, but the opportunity is for the board to more clearly articulate their strategy and benchmarks for success to a wider external audience. This includes not only firm’s overall profitability, but the value the board gives to its governance, financial situation and investments and sustainability.

One of the strongest tools to combat activism is to plan early and act fast. Establish clear and transparent communication to all shareholders and institutional investors, long before there is an attack on the company. Building strong direct relationships with shareholders and the public will only benefit the company and form part of a strong effective activist defence campaign if it is every needed.

[1] The Australian Financial Review Magazine, 26 September 2014, How corporates are yielding to people power

Alasdair Wight

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2 thoughts on “Shareholder Activism: a disruptive investment strategy growing in popularity

  1. Good summary on the topic of Shareholder Activism.
    Given Activism is a legitimate mainstream investment strategy in the US and parts of Europe, it is only a matter of time before it becomes common place in Australia (rather than ad hoc).
    At times, Corporate Australia needs to be shaken up for the benefit of all shareholders. However, the more money that gets allocated into the passive / EFT style funds the less accountability actually exists for “value related” decisions by Corporate Australia (not Governance).
    Specialist Activists will generally only come to play in Australia when they get comfortable that the value equation stacks up on a risk-adjusted basis and importantly there is likely to be broader market support for their campaign / action.
    To the second limb, my view remains that the biggest hurdle to the adoption of mainstream Activism in Australia is actually a change in approach by the existing local institutional Investors (active managers). Many of the large Instos are best described as Toothless Tigers who shake the tree and cause havoc for 2 minutes (generally behind closed doors) but rarely follow through with action to press for change. When the Aussie instos start to genuinely get behind such potential / actual Activism campaigns / actions and deploy a more active engagement for necessary value enhancing change, then Australia will start to see Shareholder Activism go mainstream.

  2. This could become very interesting if the traditional “mum and dad” investors mix and join forces with the larger activists. The Boardroom will have to establish more open communication to all shareholders / stakeholders and be prepared. Great article.

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