Fine-tuning your response to shareholder activists



A new report warns that too many boards are complacent about shareholder activism or fail to see its risks. And those using traditional defence tactics to tackle activists are likely to find themselves outflanked.

The report, Shareholder Activism in 2014: Are You Prepared?, was prepared by GPS, which specialises in defending activist campaigns.

In it, GPS says most activist or dissident action in Australia has historically been confined to smaller listed companies, but activists have shifted gear since early 2012. Examples of this include Crown’s campaign against Echo Entertainment’s chairman; Mark Carnegie and consortium’s tilts at Qantas, Fairfax Media and Brickworks/WH Soul Pattinson; Ian Dunlop’s tilt for a BHP Billiton board seat; and institutional agitation at Newcrest, Leighton and David Jones.

GPS reports a surge in activist activity last year, with a leap in board spill campaigns – between one to three each week – and 78 “strikes” and 16 near misses against Australian Securities Exchange (ASX) company remuneration reports.

It also points to heightened activity from activist investors and private equity firms, the re-emergence of corporate raiders like Sir Ron Brierley and Dr Gary Weiss and the recent creation of dedicated “activist” funds, such Alex Waislitz’ Thorney Opportunities, Gabriel Radzyminski’s Sandon Capital and Mark Carnegie’s Companion Fund. And, in January 2014, a record eight board spills were announced.

GPS says the issues that attract activists are varied. “They can include poor performance, misaligned strategy, governance and remuneration issues, nil-premium control opportunities, inefficient capital management, board indifference and mismanagement, disaffected co-investors and related party conflicts. Activists in 2014 are looking very closely at all these openings and any others that opportunistically emerge.”

So who are the activists? “Sometimes they are corporate investors, hedge funds or private equity. Other times they are smart individuals or boutique funds willing to risk a fight. Increasingly, they are specialist investors whose purpose in life is to extract value from any perceived opportunity,” says GPS.

“But also they are large institutions driven by changing local and global governance mandates or significant on-register investors.”

To deal with the risks, GPS advises taking these steps:

  • Examine your board.
  • Know your shareholder base.
  • Assess your corporate governance.
  • Perform financial and peer reviews.
  • Develop a communications plan.
  • Develop a shareholder and media engagement strategy.
  • Assemble your communications team.
  • Develop an activist response manual.

When assessing your board and corporate governance, GPS says you should examine the following:

  • Are your internal rules and charters up to date?
  • Do you have a plan for board tenure, nominations and succession? Are any board members “over-boarding”?
  • Do you have a director skills matrix?
  • Is your D&O insurance cover adequate?
  • Is your remuneration structure best practice and peer tested? Are all interests properly aligned?
  • Has the company’s strategic plan been effectively communicated?
  • Are appropriate risk management procedures and controls in place?

GPS notes that investors who are frequently engaged and have bought into the company’s strategic vision are less likely to support activists.

According to GPS, the board should play a greater role in the shareholder engagement process. To do this, companies should identify who from the board should speak and under what circumstances. The board should be fully briefed and directors should know who the shareholders are and their relative importance in the context of engagement and the nature of issues and concerns.

However GPS notes that one size doesn’t fit all and each company needs to determine what its board’s role will be in the event an activist appears.


 

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