Inside the activist investor’s playbook

Thursday, 01 June 2017


    Professional investors seeking to earn returns by employing an activist strategy will likely follow the playbook outlined below by investment firm, Credit Suisse.

    Activism is a style of investing made famous in the US and increasingly employed in Australia. It involves an investment firm building a position in a listed company, publicly “agitating” for change using various shareholder mechanisms, before (ideally) selling shares at an increased price.

    “Activists are value investors that agitate for change to generate shareholder returns,” says Credit Suisse’s Hasan Tevfik.

    To come up with a locally relevant activist playbook, Tevfik has studied the process of Elliott Advisors, which he describes as one of the most active activist investors in the Asian region in recent years.

    Elliott has taken positions in ASX listed companies including BHP, Telecom NZ, Arconic (formerly Alcoa), as well as companies listed overseas including Alliance Trust and Samsung Electronics.

    Activism has been increasing among shareholders of ASX companies. Meanwhile, superannuation funds – which in the past have been happy to remain passive when it comes to voting at AGMs – are increasingly engaging with company boards.

    The so-called “two-strikes” rule and the increasing influence of proxy advisors are mechanisms investors have used to successfully agitate for change. According to Tevfik, the following four steps form the basis of an approach by professional investment firms seeking to generate returns through activism.

    1. Build a stake, engage in private

    Before making the world aware of its position and intention, an activist investor will usually engage with the company in private, he says. As it is doing this, the activist is building, or has already built, a position in the stock. The engagement in private can take the form of contacting investor relations for more information, sending private letters to management and the board, or seeking a meeting with management.

    2. Make a public proposition

    If a target company fails to respond to the activist, then it is time to go public, Tevfik says. It’s at this stage that the activist informs other investors about its position and intentions, usually in an open letter. “[This is when] the activist can try and increase its leverage by trying to win over other shareholders,” Tevfik highlights in a recent investment note.

    Usually, he says, this means the investment firm will make clear its outlook for the company, its intention to nominate new directors to the board or its desire to replace the CEO.

    In addition to changes in management, the investor might recommend changes in the company’s holding structure, asset separation and operational improvements, Tevfik notes.

    3. Take action

    The promise of “action” at an upcoming AGM usually follows the public proposition, Tevfik outlines. At the AGM, shareholders are asked to agree to proposals to remove current board members and replace them with the fund’s own.

    In the recent agitation by Wilson Asset Management in Hunter Hall’s ASX listed investment company, Hunter Hall Value, replacement of directors was a feature of the agitation, a demand that was not ultimately successful.

    4. Exit position

    Finally, the activist sells its position in the targeted stock, Tevfik concludes.

    The fund will aim to sell at a premium to the average price at which it bought the shares, and may continue to hold onto the shares well after the actions if the investor continues to see value, he says.

    Onboarding tips for directors

    By the time a new director lands their first board seat – particularly on a public company board – they have likely already built a strong reputation.

    However, when joining a new board, rising expectations from shareholders and regulators coupled with a volatile operating environment and increasingly complex business environment can create a steep learning curve for new directors.

    While early contributions to the boardroom dialogue by the new director should be informed, guidance is needed as to which topics are pertinent to understand.

    To this end, the US-based National Association of Corporate Directors has recently published some guidelines aimed at providing both boards and new directors advice on how to navigate this new territory.

    The guide, Navigating the First Year: An Onboarding Guide for New Directors, identifies four core areas for new directors looking to accelerate their onboarding experience:

    1. Understand the operating environment in which the company operates.
    2. Learn about the company itself.
    3. Become familiar with boardroom practices and dynamics.
    4. Clarify your role and responsibilities as an individual director.

    G20 review of corporate governance complete

    The Financial Stability Board (FSB) has published its peer review of implementation of the G20/Organisation for Economic Co-Operation and Development Principles of Corporate Governance.

    The peer review examines how FSB member jurisdictions, including Australia, have applied the principles to publicly listed, regulated financial institutions. It identifies effective practices and areas where good progress has been made while noting gaps and areas of possible weakness.

    Australia ranks highly in almost all areas identified by the FSB’s peer review. In assessing the review, Guerdon Associates pointed out a number of areas in which Australia was flagged for good practice:

    • The jurisdictions which have corporate governance codes that apply on a comply or explain basis, where such disclosure to the market is mandatory, include Australia, France, Germany, Italy, Russia (for listed companies), Singapore, South Africa, Spain and the UK.
    • In some jurisdictions (Australia, Italy, the UK and the US, for example) regulatory agencies make cooperation arrangements with other regulatory authorities available on their website.
    • Only Australia has regulations that require a formal board renewal process. However, other regimes appear to have a stronger regulatory framework to ensure management succession.
    • Few countries have progressed on establishing frameworks for denoting a “tone from the top” to manage risk culture, with Australia saying that, in its formative stages of understanding what this means, it is too early to regulate. Nevertheless, APRA recently issued a standard which requires that the board form a view of the risk culture in the bank, and identify and address any desirable changes to the risk culture. The introduction of this requirement has resulted in risk culture becoming a key focus for prudentially regulated boards.
    • A review of the appendices to the FSB report comparing all FSB G20 countries indicates that Australia meets governance requirements well, while there are some surprising areas of poor governance from other G20 countries.

    The peer review offers a number of recommendations to FSB member jurisdictions, standard-setting bodies and financial institutions focusing on the following areas:

    • Ensuring the basis for an effective corporate governance framework.
    • Disclosure and transparency.
    • The responsibilities of the board.
    • Rights and equitable treatment of shareholders and key ownership functions.
    • The role of stakeholders in corporate governance.

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