Shareholder activism in Asia
August 2018 | FEATURE | BOARDROOM INTELLIGENCE
Financier Worldwide Magazine
August 2018 Issue
Shareholder activism, both disruptive and collaborative, has attracted increased attention in recent years. While previously most commonly associated with the US, activism is now gaining traction in other jurisdictions. To the end of October 2017, activist shareholders launched $45bn in new campaigns globally, according to Lazard, with notable activists including Elliott Management, Trian Partners and ValueAct Capital, among others.
The first half of 2018 also saw considerable activity. In Q1, $25bn of capital was deployed, a record 73 campaigns were launched and 68 board seats were won. Europe accounted for 23 percent of all campaigns launched, according to JP Morgan. And though the US and Europe were the most targeted, large companies elsewhere also attracted activist attention.
In Asia, the number of companies publicly targeted more than doubled between 2013 and 2016, according to Activist Insight. Last year, 106 Asia-focused campaigns were launched, compared to just 10 in 2011, according to JP Morgan.
Campaigns in Asia have been more evenly distributed across all sectors than in other regions. JPMorgan found that between 2011 and 2017, no sector surpassed 11 percent of total activity. In Australia, the US and Europe, during the same period, the most targeted sectors represented 40 percent, 19 percent and 15 percent of all campaigns, respectively.
Asia’s style of business has long been considered ill-suited to activism. Public criticism from disgruntled investors is still fairly uncommon in the region, as they prefer to exert influence behind closed doors. A sense of respect also dissuades activists from embarrassing other business leaders in public. Given these cultural nuances, what has driven the increased popularity of shareholder activism in a market previously unreceptive to it?
“There has been a significant shift in attitude toward shareholder activism in Asia,” explains Jonathan Wenig, a partner at Arnold Bloch Leibler. “Historically, the low rate of shareholder activism in Asia reflected the perceived challenges of penetrating a market that was characterised by complex ownership structures, family control and government participation. This attitude has shifted as activists increasingly perceive these factors as representing an opportunity to leverage their own interests.”
Local economic growth and a significant eastward shift in the global economy have also played a key role. “Activism follows the money,” says Deborah Hayden, regional director of the Japan capital markets and M&A practice at Edelman. “As Asia increasingly becomes the powerhouse of the world economy, more investors are drawn to take a closer look at potential value-creating opportunities. The Organisation for Economic Development (OECD) predicts that leading Asian economies will post higher growth rates than the global average of 3.7 percent in 2018. China is expected to post 6.6 percent growth and India 7.0 percent.”
In addition, the saturated landscape in the US is forcing activists to look further afield for new targets, and Asia is a fertile and largely-untapped resource. In Japan, for example, activists have been drawn to the large sums of unused capital sitting in corporate treasuries. Activists often pursue share buybacks or dividend increases, or both, and Japanese companies in 2017 saw the average return on equity (ROE) surpass 10 percent for the first time, according to Nikkei, nearing the 12.8 percent average recorded in the US.
The proliferation of global institutional investors taking stakes in Asian companies is another turning point. Institutional investors are often keen to support activism. For example, Elliott Management recently challenged South Korea’s top two family-run conglomerates: Samsung and Hyundai.
With regard to Hyundai, where Elliott holds more than $1bn in shares in three of its key affiliates, the fund called for “a more detailed roadmap as to how it will improve corporate governance, optimise balance sheets, and enhance capital returns” at Hyundai Mobis, Hyundai Motor and Kia Motors. In response, Hyundai announced a corporate restructuring scheme which will streamline its ownership structure by spinning off its domestic module and after-service parts businesses, merging them with logistics affiliate Hyundai Glovis.
Elliott dismissed Hyundai’s proposed restructuring plan, calling it insufficient. It called on Hyundai to adopt a holding company strategy and combine Hyundai Mobis with Hyundai Motor, and demanded that Hyundai establish a clear policy for dividend payouts and appoint more independent board members. “We believe this is truly a unique opportunity to unlock significant value in Hyundai Motor Group that the founding family and the leadership of the Group have built over the decades,” Elliott said in its presentation.
In 2017, Elliott successfully forced Samsung Electronics to increase shareholder returns. However, South Korean prosecutors are investigating whether the US firm may have violated disclosure rules during its purchase of shares in Samsung C&T Co in 2015.
Institutional investors, much more so than dispersed and diverse individual investors, could have a dramatic impact on Asian companies. Many of the larger institutional investors, such as Elliott, have track records of supporting activism in other jurisdictions. “Normally, shareholders lack interest in pursuing a cause of action due to the small number of shares that they are holding, but institutional investors are different,” says Dr William Wong, senior counsel at Des Voeux Chambers. “The case of Elliot v. Bank of East Asia is a typical example. Secondly, there is the availability of a class action, which gives ammunition to shareholders to take legal action. Thirdly, there has been an increase in intervention by regulators, with the active and positive role played by the Securities and Futures Commission in Hong Kong a typical example.
“There are more institutional investors, at least professionals from the buy side, who are keen to make sure that there is good corporate governance in the companies in which they invested,” adds Dr Wong. “Furthermore, after the Lehman Brothers collapse, regulators are now much more actively pursuing companies which have caused prejudice to shareholders.”
Regulators are also driving change in the region by enacting reforms geared toward the adoption of international best practices in investor engagement and corporate governance. In 2017, Hong Kong Exchanges and Clearing finalised new rules for capital raisings by listed issuers aimed at “restricting abusive practices... and protecting the interests of minority shareholders”.
Corporate governance reforms and stewardship codes introduced across Asia have strengthened shareholder engagement and participation, according to Mr Wenig. Singapore accounted for 14 percent of activism in Asia last year, according to JP Morgan, and that could rise in the future thanks to proposed changes to its Code of Corporate Governance. A consultation paper released in January suggested that more should be done to encourage board renewal, strengthen director independence, enhance board diversity, and disclose the relationship between remuneration and value creation.
In Korea, shadow voting was abolished in December 2017 and mobile voting was introduced which will make it easier for shareholders to gain access to general meetings. The Financial Services Commission (FSC) announced in February 2018 a plan to encourage minority shareholder participation at meetings for listed companies.
China has also seen a rise in activism, so much so that the China Securities Regulatory Commission (CSRC) is more actively policing unlawful practices at listed companies. Class action lawsuits are appearing more frequently. A pilot programme has been launched which will allow disgruntled investors to come together and litigate collectively.
On the fringes of Asia, Australia has also seen a rise in activism. The Australian market is characterised by the widely distributed ownership of public companies as well as the role of superannuation funds, which have the voting power to exert influence on board decisions and tend to have something of a longer-term bias. “These superannuation funds have a vested interest in the long-term success of companies and are increasingly willing to flex their muscle over important decisions,” explains Mr Wenig. “Still, major shareholders in Australian companies hold significantly less stock in public companies than, for example, major shareholders in US companies. In Australia the 10 largest institutional shareholders would, on aggregate and on average, hold about 15 percent, meaning their ability to exert influence is diminished as compared to their US counterparts.”
In Australia, while resolutions put forward by shareholder activists rarely attract support from the wider shareholder base, companies are aware these resolutions could gain support in the future. That is why they are more likely to engage with their institutional investors and build their investor relations function with a greater focus on transparency and trust.
“The findings of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry in Australia are expected later in 2018 and, given the recent revelations from the hearings regarding unethical practices, will likely result in a greater focus placed on banks and super funds. On environmental and social issues, the resources and primary industries sectors are also becoming increasingly susceptible to shareholder activists and are expected to be targeted in future,” says Ms Hayden.
In Japan, the Corporate Governance Code and the Stewardship Code are aimed at forcing investors to actively engage with companies in order to carry out their fiduciary duties. Japanese companies are now faced with clear targets of higher return on equity, higher capital efficiency and much greater levels of transparency for shareholders. In 2017, 28 Japanese companies found themselves subject to the demands of activist investors.
“Activist investors are targeting companies with discrepancies between the market value and the actual corporate value, allowing them to profit by aggressively addressing these discrepancies, and in recent cases, winning,” says Ms Hayden. “This is slowly forcing Japanese companies to focus on shareholder value, achieving a fair valuation from the market, and ensuring corporate governance is acceptable from the perspective of general shareholders. This will involve a degree of investor communication that will render the traditional practice of recycling earnings reports with updated numbers obsolete. Until Japanese companies can move from a finance-driven number check to telling a growth story supported by the numbers, expect to see more activism in Japan. The difference driven by the governance and stewardship codes means Japan’s sleepy institutional investors are beginning to take notice.”
Asian companies have also become more receptive to direct and open engagement with their investors over the past few years. Corporate culture has slowly begun to change. Practices such as generational succession are becoming less popular and activists are emboldened, demanding that managerial transitions be made based on merit, not nepotism.
These changes have not occurred overnight, however. Momentum has been gathering at a steady pace, as changes are woven into the fabric of Asian capital markets.
Though it can be disruptive and damaging, shareholder activism is here to stay, in Asia and beyond. While companies can develop strategies to counter activists, it would be prudent for them to better understand their investors’ concerns and motivations. Forewarned is forearmed.
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