Shareholder activism is here to stay … now what do we do about it?
If you want a quick insight into the rising levels of interest and concern around “shareholder activism in Australia” then you need only Google that very phrase.
By our count, 16 of the first 25 results involve professional services firms providing a glimpse into the phenomenon and promoting their ability to help prospective clients prepare for it.
There is also an entry for an event that was hosted by the Macquarie Applied Finance Centre in April. Not surprisingly, it was marked as “sold out.”
Shareholder activism is hardly a new thing – Isaac Le Maire might have coined it in the 1600s during his stoushes with the Dutch East India Company – but it has gained far greater profile in Australia over the past two years, largely as a result of the Paul Singer-run Elliott Management setting its sights on one of our national corporate icons, BHP.
Elliott believed BHP could unlock $22 billion of value by, among other things, scrapping its dual-listing and consolidating on the ASX, and it executed a very public campaign in 2017 to make sure everyone knew as much.
“Rightly or wrongly, there was a perception in the marketplace that BHP was not listening well enough to its investor base and had therefore forgotten who its masters were,” Cannings Purple director of media strategy Peter Klinger said.
“Compounding the challenge for BHP – which Elliott clearly used to its advantage – was the need to satisfy so many different subsets of shareholders, which for a company of BHP’s size invariably means that competing interests have to be accommodated. Does the company invest to grow, or maximise dividends?
“Elliott didn’t have this conundrum. It had one simple message, driven by its singular vested interest to drive the BHP share price up in the short term – irrespective of the long-term consequences to BHP. A sophisticated communications strategy, across investors and financial media in particular, resulted in Elliott staking a surprise leadership claim in the public discussion around BHP, and forced the company to respond.
“In the end, BHP recovered the initiative through some decisive actions and consistency and clarity of message that balanced short-term with long-term investor needs. But the battle with Elliott illustrates how aggressive shareholder activism has become.”
BHP remains dual-listed, although it did strike a deal to sell its US onshore oil and gas assets to placate investors and installed a new chairman with a strong history of investor engagement. But the Elliott push opened Australian eyes to a new sophistication in shareholder activism and the fact the targets are not just small, obscure, mismanaged or fringe corporations.
There were public press releases, a whitepaper compiled by independent consultants, a website dedicated to the cause and social media campaigning. According to media reports, a tram is still running in Melbourne featuring Elliott’s “Fixing BHP” advertising.
Data gathered by global specialists Activist Insight suggests that shareholder activism is not only here to stay in Australia but steadily on the rise.
In September 2014, there were 36 activist campaigns under way across Australia. At the same stage last year, the number was 42. This year the number has risen to 50.
The Aussie attraction
The Australian market has regulatory features that are likely to make it particularly attractive to activist investors.
It also has a highly competitive and sophisticated financial and business media landscape, which loves nothing more than a contentious corporate battle and therefore laps up activist activity.
Voters holding only five per cent of a company have the right to put resolutions to a general meeting (including resolutions to appoint and remove directors), while a “two-strike rule” means that a company’s board can be spilled if its remuneration proposal is voted against by at least 25 per cent of voting shareholders in consecutive years.
But Australia’s biggest lure for shareholder activism might be what overseas hedge funds – like the New York-based Elliott – view as a far less-crowded market space.
According to Activist Insight, only 19 per cent of shareholder campaigns in Australia between 2013 and 2016 came from international investors. In Canada, the figure was 45 per cent and in Japan it was 44 per cent.
As leading Australian corporate law firm Gilbert + Tobin noted recently, if an activist short-seller like Soren Aandahl figured the Australian market was ripe for the picking before the banking Royal Commission and the Australian Prudential Regulation Authority inquiry into Commonwealth Bank, imagine how they might view the local scene now.
“If Aandahl’s theory of what makes a market attractive for an activist was correct before, this is only going to be amplified in 2018/19 and beyond,” G + T’s Tim Gordon’s outlined in his corporate governance blog Fishing with Dynamite.
“Australia already has a continuous disclosure regime that punishes companies for honest mistakes, turns inherently uncertain but good faith forecasts or outlook statements into guarantees and market structures which facilitate turbo-charged short selling practices.
“Once again, this is only going to increase in the post-Royal Commission, APRA Report and BEAR-world where scrutiny on, and nervousness amongst, boards around any perception of poor governance will be enormous.”
There is also now an added wrinkle to the shareholder activism scene – the emergence of ideological activism revolving around aspects such as climate change, gender diversity, supply chain ethics and irresponsible credit lending.
A coalition of investors successfully proposed resolutions at the 2015 BP and Royal Dutch Shell AGM to invest in renewables, change bonus structures and test business models against targets in a bid to limit global warming.
Closer to home, Rio Tinto has also faced climate change-oriented resolutions in recent times.
So how do you prepare yourself as a company to best deal with shareholder activism?
“It starts with proper engagement of all your shareholders – big, small, local and foreign,” Klinger said.
“You need to be taking the temperature among your shareholders all the time. You can’t truly respond to concerns and have an open dialogue and effective communication unless you are listening in the first place.
“I think the perception is that’s where BHP got caught on the hop initially. That sort of detailed engagement perhaps wasn’t there to begin with and then in comes Elliott and all of a sudden they are dealing with something publicly that they probably didn’t see coming.”
With more than 20 years’ experience in finance journalism and strategic communications, Peter Klinger is an expert on media strategy, engagement with stakeholders, crisis communications, and media training. If you need help getting your message across to shareholders, contact Peter.