The Green Room
Shareholder activism may have finally come home to roost for Australian company boards, with 2013’s AGM season being met by the kind of agitation that market observers have long been predicting would arrive Down Under.
According to a recent report in The Australian, Goldman Sachs estimated that activist funds such as Dan Loeb’s Third Port and Carl Icahn’s Icahn Associates had about US$197 billion in firepower to invest in global companies they believed they could agitate towards better returns.
And yet while a number of high profile campaigns have grabbed the market’s attention in Australia in recent years – Gina Rinehart’s tilt at Fairfax Media and James Packer’s disruption at Echo Entertainment to name but two – the local experience has been comparatively limited in recent years.
That was until now. While the imposition of the “two strikes” rule in 2011 put boards on high alert to shareholder revolt, particularly around the issues of remuneration, the FY2013 AGM season saw an increase in the number of attacks, as well as greater variety in the rationale behind them and the approaches taken.
Uncertainty for Shareholders
Remuneration remains an issue – witness, for example, Cabcharge, which received a strike against its remuneration report for the third year in a row, or the 39.5 per cent of votes cast against the remuneration report at the David Jones AGM – however FY2013’s meeting season saw an increasing incidence of investors using their equity holdings to affect more profound corporate change.
One of the most high-profile examples has been the attempt by Perpetual and Mark Carnegie to unwind the four decades old cross-shareholding between Washington H. Soul Pattinson and Brickworks. That stoush appears likely to drag on well into 2014, with any number of legal and regulatory issues to be worked through, prolonging the uncertainty for investors in both companies.
Carnegie isn’t the only well-known Australian investor to be back on the front foot. Over at Wilson Asset Management, Geoff Wilson succeeded in rolling the board of the Australian Infrastructure Fund, while Gary Weiss, notorious for his raids on AGL and North Broken Hill in the 1980s, emerged with an 8.12 per cent stake in copper junior Hillgrove Resources before reportedly writing a stinging letter to the board over perceived operational and strategic issues. The strategic review announced shortly afterwards was purely coincidental, according to management.
Both shareholder activism and Weiss look here to stay, with the notorious “corporate raider” recently being appointed to the board of newly listed activist investor Thorney Opportunities. Directors looking over their shoulder at Weiss and the new fund may not have too long to wait for more fireworks – Chairman Alex Waislitz has said that Thorney Opportunities’ first investment may come as early as the first half of 2014.
Boards be Prepared
So with shareholder activism becoming more widespread, what can boards do to prepare themselves and hopefully ward off the threat of an activist challenge?
Essentially, companies and their boards need to become more proactive in their engagement with investors and that should start way before AGM season.
One key job here is to ensure that a company knows its share register – only through regular searches and analysis will new holders and other changes be identified, and in particular the arrival on the register of other corporates or investment managers with an activist approach. The availability of this kind of information is a key advantage that a company has in the short term.
If a company isn’t doing so already, it also needs to get proactive in terms of communicating its strategy; including the goals it has set itself, and then providing clear reminders to the market when those goals have been achieved. While operational performance should never be ‘spun’, boards and management teams shouldn’t be complacent in thinking that their achievements will always be recognised by investors.
While that won’t always be the case, reminding stakeholders that a company has “done what it said it would do” – and in the ideal world achieved lots more – should become a good discipline through clear and consistent communication, including regular meetings, investor days, letters to shareholders, or simply through adopting consistent messaging across all materials.
That may be well and good, however operational or performance issues aren’t always the grounds for the activist campaign. In the US, where shareholder activism has been a bigger threat for longer and where Sarbanes-Oxley placed boards even more under the microscope, so-called “governance roadshows” have become commonplace. Held separately to fund-raising or post-results roadshows, these help Directors reach out to large investors in order to discuss matters of corporate governance before they become an issue.
Ideally these would be held in quieter periods, such as April or May, outside of reporting season and well ahead of the end-of-financial year activities, such as drafting of the Annual Report or preparing for the Annual General Meeting, so that any feedback may be taken into account and acted upon, and to ensure that the investors have time to meet.
At the very least, these governance roadshows would highlight any upcoming issues, but they may also help to give an indication of voting intentions, or the fund managers may indicate what proxy advisers they listen to. Given the increasing prominence of the proxy advisers, they may even be included in the roadshow, again to ensure that the board has put its case well before the proxies are cast.
The Gloves are Off
So, as the dust settles on a busy AGM season, it looks as though shareholder activism has finally arrived in Australia in a meaningful way. While many boards may find themselves blind-sided by this kind of approach in the coming months, there are a number of simple steps that boards may take to get ahead of the threat and position themselves better for the fisticuffs that may be around the corner.
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