* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Download Trends in shareholder activism
Survey
Document related concepts
Investor-state dispute settlement wikipedia , lookup
Business valuation wikipedia , lookup
Private equity wikipedia , lookup
Private equity secondary market wikipedia , lookup
Private equity in the 2000s wikipedia , lookup
Early history of private equity wikipedia , lookup
Land banking wikipedia , lookup
Private equity in the 1980s wikipedia , lookup
Stock trader wikipedia , lookup
Fund governance wikipedia , lookup
Investment fund wikipedia , lookup
Syndicated loan wikipedia , lookup
Transcript
International Governance Shareholder activism is on the rise — would you know how best to handle an activist shareholder or even what your options are in this regard? Trends in shareholder activism Would you know the difference between an active investor and an activist investor? By Brendan Sheehan, Principal, Global Governance Advisors The following article by Brendan Sheehan provides some valuable insights into shareholder activism, what it is, what it means and options to minimise and manage the negative aspects of the increasing trend toward activism. The article also provides very practical tips on how to recognise and manage the underlying issues, which are not always the publicly stated issues put forward to justify an activist approach. The growth in shareholder activism is a trend that is generally seen as emanating from the United States and most would agree it’s a trend that is here to stay. I hope you can use the article to be better prepared to deal with activist tactics. Peter Turnbull FCIS International Representative The past year and a half has seen a significant shift in the world of shareholder activism. Once regarded as the realm of short-term hedge funds looking to effect change at a company in order to achieve an immediate return — often at the expense of long-term investors — activism is now considered mainstream. While still in the minority in terms of share ownership — a recent study placed total holdings of traditional ‘activist’ investors at a little over 1 per cent of the market in the US — activist investors are gaining support from many sectors of the investor community including major pension and mutual funds. And this, in turn, is impacting the way they interact with corporate boards and management. Activist and active investors (more on the distinction later) are increasingly gaining both political and public support largely through targeting corporate management on grounds of underperformance. It is hard not to agree with such arguments — no matter have accurate they actually are. Overall activism changed significantly in 2013 and the first three quarters of 2014. Activists are increasingly seizing on governance issues as the ‘point of entry’ for the conversation. They look for underperforming companies 578 and look for governance issues like board structure, voting practices or compensation models. CalSTRS, for example, played a part in 77 companies implementing majority voting in 2013 in the US. The reality is that these structural governance issues are rarely what an activist is really interested in but governance failures are a very easy and popular way to target a company and garner strong voting support from institutional investors. By the numbers There is no doubt that activism globally is on the rise. An analysis of 2014 disclosures shows that almost one in five S&P 500 companies have been the target of a public activist campaign so far this year. That number more than doubles when you include behind-thescenes approaches that never make it to the public eye. In fact, a recent study from EY suggests that nine out of ten boards say that shareholder activists impact the board agenda. While still largely a US phenomenon, instances of activism are rising in Europe and other jurisdictions like Australia as shareholder see the success being achieved in the US and as regulatory environments shift to support greater shareholder access. There are a range of reasons for why activist investors are gaining mainstream acceptance and support. Firstly, the activist themselves are much larger. The amount of money invested in activist funds has increased significantly in recent years. According to a study from US law firm King & Spalding, funds controlled by activist hedge funds have increased from US$12 billion to over US$100 billion in the last decade. This does not include many massive pension and mutual funds that do not consider themselves ‘activists’ but are ‘active’ in the way they invest and have come to support some activist campaigns. This includes giants like CalSTRS, CalPERS, TIAACref and OTPP. Activists, and shareholders in general, are also communicating much more than they have in the past. Despite laws restricting collusion or acting in concert many investors share strategic information about companies they are targeting and investing in. In fact, several websites and blogs exist for this specific purpose. Some are public but most are private, members-only forums. Big-name support Perhaps one of the most significant developments is the increasing ‘activeness’ of long-term holders like the pension funds. These groups have traditionally not supported activist hedge fund campaigns on the grounds that the desired outcome of the hedge fund is a short-term capital event that may not be good for the longterm performance of the company. This view is changing rapidly. Many large investors now see some value in activist arguments and will support proposals and campaigns that increase transparency, board access and changes to compensation models. In evidence to this point, CalSTRS recently co-sponsored a proposal with well-known and respected activist Relational Investor. Additionally many large institutional investors also invest directly in hedge funds so they have a vested interest in seeing these groups be more successful. When you combine all this with a much friendlier regulatory environment and it is little wonder activism is on the rise. During the past decade in the US many traditional take over defenses have been stripped away including supermajority voting, staggered boards, removal of shareholder rights plans (poison pills) and plurality voting, and an increased ability for shareholders to call extraordinary meetings. It is fare to say that the pendulum has swung decisively in favor of shareholders in recent years. Another important tool in the activist toolkit is the say-on-pay vote. As of September, a total of 60 companies in the US have failed to secure majority support for their compensation plans. A further 139 got between 50 per cent and 70 per cent support. This is considered the ‘danger zone’ as companies getting below 70 per cent will get additional attention the following year. As mentioned earlier, compensation is rarely the problem in and of itself but increasingly pay is seen as a window into the broader governance of a company. Activists and other investors feel that if the board is approving poor compensation structures then it must be making mistakes elsewhere. After all, compensation is a capital allocation decision and in this business environment capital allocation is an extremely important activity. For the most part, say-on-pay votes focus on pay for performance. Investors are casting an eagle eye over what hurdles and metrics management must clear to receive bonus payments. Elements such as severance payments and accelerated vesting of options are a particular sore point, as are structures that allow for board discretion to pay executives even if they fail to outperform peers. Pay for performance has been a very successful lever for activists in the past 12 months. These votes take on a greater importance, however. There is emerging evidence that board directors at companies, which receive say-onpay votes less than 70 per cent, are likely to face ‘Vote No’ campaigns against members of the compensation committee. Given that a key desire of activists is to gain board seats it is vital that companies have a complete understanding of best practice in executive compensation and set up pay structures that have a strong and strategic link to performance. Golden parachutes and severance are the most likely elements to upset investors. Underperforming CEOs getting large payouts is a massive focus. New share issuance to fund executive pay plans (which is dilutive for existing shareholders) was another contentious issue. Just under 17 per cent of plans seeking new issuance for executive compensation plans were voted down in 2014 so far. There is no doubt that 2013 and 2014 have been watershed years for activist investors in the US and globally. Companies must take them more seriously. In fact the entire relationship between investors and corporate management/boards is shifting. There was a time, not so long ago, that an activist hedge fund targeting a megacap company — with its deep pockets, expensive lawyers and professional investor relations teams — was almost unthinkable. That is certainly no longer the case. By the time 2014 comes to a close it is likely that over 50 companies with market caps greater than US$10 billion will have been publically targeted by activists in the US. We have also seen major companies in Canada and the UK being aggressively targeted. Now that we have established that activism is more prevalent we should examine how successful activists are? At the moment the research is not definitive as to whether or not activists actually create value for shareholders over the long-term. For every study suggesting they drive long-term value there is another disputing it. There is no doubt that the announcement of activist campaigns typically leads to a short-term increase in share price. What is true is that activists are becoming far more successful in contested fights for board positions. In 2013 activists won 68 per cent of short slate contests (fights to secure one or more board members that are less than a majority), according to King and Spalding. This figure will likely be similar in 2014. Looking at the numbers in a little more detail, Schulte, Roth & Zabel counted 237 public activist actions globally in 2013 — 71 per cent of which were in the US. This is a 9 per cent increase from the year before. Of those, activists achieved a 59 per cent outright success rate but that figure increases to 78 per cent when partial success is included. These are instances where Governance Directions October 2014 579 International Governance There is also a rise in cross-border activism where investors from one country target a company listed elsewhere. the activist may not have achieved all its stated objectives but the company implemented some of them. There were 67 actions that sort board seats for an activist representative. The vast majority of these actions did not go to a full proxy fight and in many cases the company settled without the need for a shareholder vote. There is also a rise in cross-border activism where investors from one country target a company listed elsewhere. This is most common among US investors and Canadian firms but also with UK and European investors starting action against US firms. Importantly for Australian companies a number of activist US hedge funds opened Australian offices in 2014 which may be a sign of increased activity locally in the year ahead. Dealing with an activist So, what is a company to do if, or rather when, it receives ‘that call’ from an activist investor? There are many things that corporate management and boards need to be doing in this age of heightened transparency and the reality is that most of the work done to deal with an activist needs to be done well in advance of ‘that call.’ Firstly, a company should conduct a governance risk assessment. This is a detailed and honest examination of the company’s governance practices and should be done on both an absolute and relative basis. This means that the company should assess its internal practices, board governance 580 procedures, director skills, and perhaps most importantly its compensation structures as a stand-alone policy but also compare their practices against those of the peer group. This type of risk assessment usually requires the help of professional advisers and should ideally be conducted at least bi-annually. By performing this assessment a company will be able to identify areas where its practices differ from the norm — and thus are likely red flags for investors. The next step in preparing for shareholder engagement is to understand your shareholder base. It is important to always have a good understanding of which investors make up the top 25 or 50 holders. It is likely that compiling this list will require professional assistance since it is not always publicly disclosed. It is possible to identify major holders on a quarterly basis in the US once by monitoring 13-d and 13-g filings. But in this modern age activists can accumulate positions very quickly and it is possible a new holder could move into a position of significant ownership in a matter of days without management being aware. There are professionals who are skilled at actively monitoring corporate share ownership and can advise investor relations departments on any movement of interest. In knowing your shareholders it then becomes possible to understand their attitudes. The old way of doing this was to employ a proxy solicitation firm with knowledge of and connections to the investors. This is still an effective method although emerging technology is making it far easier and more cost effective to examine institutional voting practices. Sophisticated data collection tools will permit a company to examine how all its shareholders have voted at peer companies, the sector or market as a whole in current and previous years. This is a powerful tool for identifying institutions that are most likely to support or oppose management and identify the issues that are of greatest concern to those investors both as a group and individually. Engagement, engagement, engagement Of course, as with all market intelligence, it is only as useful as what you do with it. Boards and management must use this information to create an outreach strategy to effectively engage investors in dialogue. Most, if not all, the investors on the register are unlikely to be activist hedge funds. Activist funds usually only hold very small percentages of a company's overall stock and rely on the support of major institutional investors to put pressure on management or, if it comes to that, a vote on a dissident proposal. By identifying and engaging with major institutional holders on a regular basis and ensuring their voice is heard in the boardroom it is possible to greatly minimise the likelihood of an activist targeting your company. Activists tend to go after the easiest targets. If a particular company has effective outreach and a good relationship with shareholders then it may deter the activist from approaching. This leads to a larger and perhaps more important strategic issue. More often than not the reason an activist targets a company is because of real or perceived failures either in the financials or governance processes. By conducting a detailed governance risk assessment the board will not only be able to anticipate areas an activist might target but it can also use that information to address the underlying issues and make changes or improvements to its processes. This is arguably where activists have the greatest positive impact. By attacking companies with questionable governance or financial performance they are shining a light on issues that companies can address. In going through that process it is not unusual for long-term efficiencies to be created within the company. Preparing for a fight Of course there are often times when corporate management may disagree with the opinions and demands of shareholders. If this is the case and management does not intend to cede to investor demands it is vital that the company has a well-prepared investor relations and communications plan. Telling the corporate story to the wider investor base and the media is important. Management should also review its takeover defense options and prepare legal defenses if it plans to fight. There are still many major pension funds and other long-term investors who view activists with suspicion so it is definitely possible to get out in front of a situation and explain to the longterm holders why the activist is wrong and how management is more focused on achieving long-term value creation. Technology and financial services sectors were the most popular targets for activists in the US although healthcare and basic minerals were also well represented. with better governance in the long term. More and more pension funds are turning to activism and supporting hedge funds. Having a plan is vital. Know your investors. Understand how your governance practices stack up against best practices. Ensure the board fully understands executive compensation plans and stress test the payouts. And most importantly, don’t automatically dismiss active investors. They may have valuable insight and ignoring their voice or shutting them out will likely end in expensive and distracting clashes with investors. Look at it this way, these people have invested in the company, why not make sure they feel valued and will be there for the long term. Brendan Sheehan can be contacted by email at [email protected]. Top 10 activist investors in the US: 1. Icahn Enterprises — run by famous billionaire Carl Icahn. Recent targets: Apple, Hertz, Dell, Chesapeake Energy 2. Value Act Capital. Recent targets include Microsoft. Takes quiet approach. 75 targets in last 14 years 3. Third Point Partners — headed by Dan Loeb 4. Clinton Group — run by Greg Taxin. Mostly targets small cap companies 5. Starboard Value 6. Elliott Management 7. Jana Partners — shot to fame with contested fight with Canadian giant Agrium 8. Gamco Asset Management 9. Pershing Square Capital — founded by Bill Ackman 10. Bulldog Investors In short, activism is here to stay and it is important for companies to be prepared. Today’s activists are clearly not the corporate raiders of the 1980s. Despite their reputation they tend to leave companies in good shape and Governance Directions October 2014 581