VICTORIA GEDDES, ECECUTIVE DIRECTOR
The role played by the activist in the US capital markets has moved over the past 10-15 years from pariah to one of being a positive catalyst for change. Today proxy contests associated with nominations of independent directors for board seats are more likely to be won by activists than the company1 – a complete reversal of the situation at the turn of the century.
In Australia, the reality is that 96% of ASX 200 companies2 have never encountered an activist campaign. This is not to say they haven’t had robust discussions, behind closed doors, with a shareholder or group of shareholders which has led to changes being instigated without the need for a public contest. The US experience, however, offers some insights for what Australian companies and boards can expect and what steps they can take to inform and prepare themselves for what is to come.
Monitor the Register, Gather Intelligence, Communicate
In the US boards are increasingly wanting/demanding more and better information on what is happening to their shareholder base. For investor relations officers (IROs) this also means supplementing the data with insights based on intelligence gained from speaking with shareholders, following online chatter and any news in the market that is linked to the company, its management or board.
IROs are required to understand what drives each fund managers’ investment in the company so that when an activist appears they understand how they might react. We know that long only institutional investors can, and do, collaborate with activists to provide a catalyst for change and directors are better served by understanding any concerns they might have ahead of time rather than finding out when it is too late. There are really only two ways to do this:
— regular conversations with shareholders seeking their feedback on how they view the company
— bespoke perception research in order to be sure that you are not missing anything. Many fund managers value access to management and can feel constrained in providing frank commentary about management and board unless it is provided, unattributed, to an independent third party.
Activists rarely challenge companies on an issue that no-one else has thought about or identified. Often they are simply the catalyst for a situation that has been simmering for some time and they make change happen – in other words it is something that could have been avoided.
An activist event that leads to a contested situation is almost always preceded by a breakdown in communication. So by the time an activist campaign goes public, we can assume that the activist will have spoken to most of the major shareholders on the register and will have constructed a well-articulated set of messages to persuade both the market and the media of their case.
So what strategies work when faced with an activist?
— Good IR that works on having regular open dialogue with major shareholders and building strong relationships with the individuals managing the investment.
— Making sure you are getting the real view by using independent parties to test what you are hearing
— Never refuse to meet with an activist but work out the best way to engage with them (one on one rather than group meetings, for example)
— Treat all shareholders equally
Most activists are focused on an outcome that is about delivering improved returns to shareholders so their mindset is essentially constructive (as opposed to short sellers who are ruthlessly focused on depressing the share price). For those companies faced with an activist seeking a board seat, it can be helpful to keep this in mind despite the apprehension that is often felt about appointing activist shareholders or their nominees to the board. For Australian boards this is particularly relevant given that over 80% of activist demands are board-related compared with 40-45% in North America2.
Preparing an Activist Plan
Shareholders expect their board to engage with activists. The days of waiting out activists, stiff-arming them or ignoring them are long gone.
To prepare for this moment, whenever it comes, a company should have the framework in place for what happens next.
— Decide who is going to be the company’s spokesperson or point of contact
— Be clear that when calls come in to multiple points at board and management level, that people know what to say as a holding statement until the agreed plan has been set in motion
— Understand the style of activist that is seeking to engage with you. Are they are ‘cage rattler’ or a constructive investor?
— Most importantly, remember that the first conversation should be about listening and finding out what is on the mind of the activist.
It is important for both the activist and the board to find ways to bring about a constructive dialogue. Most activists bring with them considerable knowledge about the company and significant shareholder support. Boards embarking on the engagement process should keep this in mind before applying the common defense of challenging the need for and qualifications of these dissident director nominees. To actively work against them may not necessarily be viewed as in the long term interests of the company or its shareholders.
Tracking the Data
A UK based survey of over 100 institutional investors conducted in 2014 revealed that over three quarters of institutions believed companies benefit from shareholder nominated, independent directors. This can come as a shock to companies who find that voting decisions on resolutions sponsored by activists have been supported by the very institutions with whom they believed they had a great relationship.
While activism in Australia is largely confined to the smaller end of the market, the level of activity is increasing. Activist Insight’s research tells us there are 50-60 Australian companies targeted each year by activists, mostly in the basic materials sector. Their intelligence also indicates that significant amounts of money are building in specialist activist funds offshore and Australia is among the top three most-cited non-US jurisdictions for future shareholder activism. The question you need to ask yourself is “can you afford to believe that your company is not going to be next?”
1 Voting stats compiled by Factset 2 Research by Activist Insight