All articles in Volume 13 Issue 14

Handling activist investors

22 July BRR image

The growth of activist investors in the US has prompted management consulting firm Bain & Company to conduct a study examining more than 400 activist investments which has found the target companies are becoming larger and the industry segments more diverse.

The study, Agitators and reformers: How to respond to activist investors, found 70 per cent of activist engagements fall into five categories: consumer goods, financial services, technology, industrials and materials.

Surprisingly, it also found that the companies targeted were not simply the expected “strugglers” but actually high-performing businesses too. This indicates that even the best companies are not immune to this new phenomenon and all need to be prepared.

The study states that a target company cannot afford to ignore an activist but nor do they need to accept or reject their ideas. Instead they need to evaluate the proposal quickly and decide how to react. The first step is to understand the common patterns of activist investors.

Bain’s findings contend that activist investors fall into two categories – agitators and reformers. The agitators are in the minority and are single-demand focused; usually on corporate governance changes like a new chief executive officer and/or directors. This group was shown to produce minimal differential return compared to industry indexes.

The reformers however, are now the largest group of activist investors and characteristically have a well-defined strategic program for reshaping the company they are pursuing. The reformers’ proposals are often carefully researched and include a high level of detail.

To be ready for an activist’s approach, Bain recommends having an emergency response plan in place that has been pressure-tested against activist patterns and objectives. The plan includes reviewing your company’s operational performance against peers, aligning executive compensation to company performance, regularly reviewing your business structures, testing the strength of your balance sheet and reviewing internal valuation against market valuation and having answers for any gaps.

A key element of the plan is effective investor relations - developing good relationships and effectively conveying your company strategy with major investors will be critical to defending your position.

Bain concludes that most companies don’t take activists seriously at first and typically respond defensively which doesn’t work. Therefore, having an understanding of activist investment characteristics, a robust plan in place and an ability to communicate quickly and effectively with key stakeholders allows the company to have the best chance of avoiding a dilemma.

Read more here.


Boards missing succession trick

Generational change offers boards the opportunity to improve performance and increase diversity, but there is little consensus on how to seize these opportunities.

This was the key finding of a new report from executive and board search firm Heidrick and Struggles (H&S) which examined the dynamics of generational changes on company boards and how many tackle, or fail to tackle, succession planning.

Titled Generational Dynamics: How boards tackle succession, the study sought the views of 487 corporate board members from around the world, which included 104 from Australia.

It found that boards are not using age limits as a trigger for board succession but rather full board evaluations (90 per cent) and individual performance evaluations of each director (53 per cent). However only 77 per cent considered these evaluations as robust – which equates to just over 40 per cent of all directors.

Given that the directors viewed these evaluations as a “powerful tool for change” only 54 per cent actually felt the board was effective in exiting underperforming directors.

With regards to age limits (and understanding that many countries prohibit age discrimination) most boards felt that arbitrary age limits were not helpful, but the majority (65 per cent) responded that 70 − 74 years of age was the ideal director retirement age.

H&S said: “We agree that age is not the issue. In our experience, it’s all about judgement, and while many companies desire older board members who can play the role of ‘wise counselor’ to a board, we also routinely encounter younger directors who have wisdom or expertise beyond their years.”

In conclusion, H&S states: “Refreshing a board is not an easy task, and there is little consensus on how to get there. Tenure limits, age limits, and the use of board assessments are all viable tools to assist boards in planning succession and rejuvenating themselves. The key, however, is to ensure a timely source of fresh perspectives that matches the company’s long-term strategic challenges.”

The study can be found here.


New merger toolkit

The trend towards a reduction in funding and revenue is creating new difficulties for many not- for-profit (NFP) entities.

State and Federal Government funding is trending downwards as governments become more austere in the face of recurrent deficits and private sector revenues are struggling with the transition from the mining boom. In this environment, what options are open to NFPs caught in the crossfire?

One option that is becoming a more serious consideration is merging with or acquiring another compatible NFP. This option can be of benefit to members and beneficiaries, can augment overall expertise, reduce duplicated costs and importantly increase revenues.

An example of this type of merger happened officially on 1 July this year between Good Beginnings and Save The Children to create one of Australia’s leading child welfare agencies. The merger allows the combined entity to increase its influence on government policy, combine programs and leverage expertise.

The process of initiating and completing a merger however can be an onerous exercise and requires effective leadership and communication. Therefore, it is important to work through a series of steps at the outset:

  • Be aware of the resources and time required.
  • Identify and engage a suitable prospect.
  • Establish if there is a cultural fit.
  • Develop clear objectives and responsibilities.
  • Be prepared for legal complexities.

To assist NFPs considering this path, Mills Oakley Lawyers has developed an NFP merger toolkit. The toolkit outlines the steps to consider in a merger scenario. Its practical information highlights details of the feasibility study phase to completing a memorandum of understanding agreement (MOU) through to negotiation, due diligence and settlement. It also provides examples of various structures and their various advantages and disadvantages.

You can view the toolkit here.

Are you a non-executive director of an NFP organisation? If so, we need your input into the Australian Institute of Company Directors’ NFP Governance and Performance Study. In addition to analysing information about cross-sector issues, this year we are focusing on NFP mergers, the arts sector and governance in federated structures. You can complete the survey here.


ASX update

In early 2015, the Australian Securities Exchange (ASX) issued a consultation paper outlining their proposed changes to Guidance Note 8 Continuous Disclosure Listing Rules 3.1-31B.

The Australian Institute of Company Directors lodged a submission in response to the consultation paper which can be read here.

After issuing a subsequent “consultation response” document in June they have now published the final form of this amendment. One of the key changes from the consultation paper draft was the removal of the proposal for any new presentation provided to an analyst or investor to be published on the ASX Markets Announcement Platform.

Companies that were initially concerned about the duplication of lodging various presentations produced for different audience segments with effectively the same information have generally welcomed this clarification in the notes.

The amendment expands guidance on earnings surprises, publication of analyst forecasts and consensus estimates, and investor briefings.

A PDF of the final Guidance Note 8 can be downloaded here.


Resolving disputes

Disputes in the boardroom can undermine board effectiveness and organisational performance, but adopting certain approaches and processes before and after they occur is imperative in handling such situations if and when they arise.

According to an article featured on the Better Boards website by James Beck, managing director, Effective Governance, there are a number of steps that directors must put in place to help prevent, or manage, boardroom disputes.

Beck says that in accordance with their fiduciary duties to the organisation, directors have a responsibility to implement good governance and the board is expected to operate collegially. While each director brings to the boardroom their own particular skills, knowledge and experience, and has a duty to apply those skills, knowledge and experience, sometimes, when doing so, the discussions within the boardroom can often become robust, and it is easy for this to turn into a conflict. Similarly, conflicts can also arise for a myriad other reasons.

Therefore, Beck counsels that many disputes would not occur had some very simple steps been taken. These include:

  • Ensuring alignment of directors with business purpose and values.
  • Clear definition of board role.
  • A board culture that encourages open and frank discussion.
  • A board that actually know each other and the management.
  • A dispute resolution process for the business, including the board.
  • Regular board performance evaluations, including the chair.

The full article can be found here.

A link to an example board dispute resolution policy can be found here.


Review of Associations Incorporation Act

Following a governance review in 2013, NSW Fair Trading is undertaking a statutory review of the Associations Incorporation Act (the Act) 2009.

The aim of the review is to ensure the Act is working as intended. The issues raised in submissions to the 2013 governance review will be considered in this review. The Act affects more than 36,000 community and not-for-profit associations registered in NSW.

NSW Fair Trading Commissioner, Rod Stowe, is encouraging the public to participate in the survey. “Six years on from the introduction of the Associations Incorporation Act, it is time to review the law and ensure it is meeting the needs of the sector,” he said.

“Incorporated associations are typically community based organisations such as sporting clubs, cultural groups, child care services and environmental groups.

“Most incorporated associations are run by volunteers. Working with the sector, Fair Trading will look for ways to cut red tape and reduce the administrative burden on volunteers running these groups,” he said.

An association under the Associations Incorporation Act is a legal entity, and is able to hold bank accounts, enter into contracts and develop rules governing membership and voting rights.

The association must not engage in trade or commerce and it must be not-for-profit.

Those who wish to have their say can complete the public survey, available until 7 August, on the NSW Fair Trading website. The review will be completed by October 2015.


Navigating digital disruption

A recent Boston Consulting Group (BCG) article suggests that we face the third wave of digital disruption and directors need to understand the enormous challenges this presents.

The article, Navigating a World of Digital Disruption by Philip Evans and Patrick Forth, describes the first wave of disruption as the arrival of the internet – the dot-com era, which saw some businesses keep up and others failing to do so. The second, faster and more disruptive wave that directors have seen recently is Web 2.0, which saw small businesses came to the fore, through self-organisation and collaboration, and which resulted in attacks on large business models. Small is beautiful, the authors say, and they grow to become large businesses such as Facebook and Google.

However, the authors describe the next “really big” wave of digital disruption as “hyperscaling” and explain that we have been moving towards this trend quite rapidly. To illustrate the point, they explain that there are now over seven billion active mobile phones, and over 2.3 billion mobile broadband subscriptions. Add to that almost 10 billion internet-connected sensors and an estimate of between one and 10 trillion sensors of other types.

The result is data, and lots and lots of it – 99 per cent is digital, and half has an IP address. “This means that half of the world’s data can now be put together, at near-zero cost, to reveal patterns previously invisible. Half of the world’s data is already, technically, a single, universally accessible document,” the article states.

The authors describe this as a digital map of the world, which has a scale of 1:1. The authors explain how it will transform businesses, how they will need to respond, and hence what directors should be now seeing in strategic plans:

1. Big data – new data is becoming available and the scale of analysis is growing. Firms need to keep up. New techniques will allow rapid experimentation yielding yet more new and better data. Firms need to consolidate all their own data and source external data with new partners and consultants.

2. Deconstruction – organise the business along competitive economics. Never compromise the competitiveness of one operation to protect another. Alliances along the value chain will be crucial.

3. Polarisation of economies of mass – “up-source” tasks to connected communities such as product support with the user groups and “down source” other activities to shared infrastructure.

4. Holistic, stacked architectures – doing the three above reveals the need to form groups and alliances where all participants can benefit from shared resources or “stacks”. It will be increasingly difficult to own or control a whole sector within an industry.

The full study can be found here.


Class announces board changes

Software solutions provider, Class, has announced the appointment of three new board members. Kathryn Foster MAICD and Matthew Quinn have both been appointed as non-executive directors while Fred Marishel GAICD and Kevin Wyld, have retired from the board.

Foster has over 20 years’ experience in creating and running large internet based businesses across 232 geographies, including holding key global roles with Microsoft.

Quinn was preciously managing director of the property group Stockland for 12 years. He is now a non-executive director of building products company CSR and UrbanGrowth NSW and is chairman of environmental solutions company Carbonxt Group and 3D body scanner company mPort.

Class has also announced the appointment of Kevin Bungard as an executive director. Bungard joined Class as chief operating officer in 2009 and in April 2014 was appointed chief executive officer.

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Ardent Leisure Group has appointed Melanie Willis FAICD as an independent non-executive director of both Ardent Leisure Limited and Ardent Leisure Management.

Willis is currently a non-executive director of Mantra Group and Pepper Group, and until March 2015, was chief executive officer at NRMA Investments.

Willis has previously held non-executive director roles at accounting and consulting firm Crowe Horwath Australasia, aged-care facilities operator Aevum, Hydro Tasmania and Rhodium Asset Solutions. She has also held senior executive positions at Deutsche Bank and Bankers Trust Australia.


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