Shareholder activism in Australia: a force for good?
October 2018 | FEATURE | BOARDROOM INTELLIGENCE
Financier Worldwide Magazine
October 2018 Issue
‘Activism’ is a loaded word with often negative connotations. It can conjure up images of confrontational people behaving aggressively in volatile situations. However, when applied to a shareholder context, activism can be a noble aim – an attempt to take underperforming companies to task and effect governance change at the highest level.
One geography in which shareholder activism is particularly prevalent is Australia.
“The rise in shareholder activism is a global trend and Australia has not been immune,” says Louise Petschler, general manager advocacy at the Australian Institute of Company Directors (AICD). “Certainly, the legal framework in Australia is activist-friendly. One hundred shareholders or shareholders with at least 5 percent of the votes have a right to put resolutions to a general meeting which can force a discussion with the board, while shareholders with 5 percent of a company can requisition or convene a general meeting.”
Another mechanism which facilitates shareholder activism is the country’s two-strikes law. “This means that if a listed company has two consecutive years’ remuneration reports record a 25 percent non-acceptance vote, the board can be spilled and a new board election is held,” explains Brett Cowell, chairman of partners at Cowell Clarke. “A law that was supposed to operate as a shareholder ‘say on pay’ structure is being used by activists to pressure boards – ‘do this or we’ll vote down your remuneration report’.” Enormously effective since the two-strikes law was first introduced in 2011, there has been an average of 17 strikes annually.
Also facilitating the rise in activism is the fact that activists no longer focus solely on issues such as corporate performance, executive pay and governance. Increasingly, activist activity is being extended to the likes of board composition and skills, succession planning, digital disruption, diversity, climate change exposure, environmental issues, human rights issues in supply-chain management, and corporate culture and ethics.
According to the Schulte Roth & Zabel (SRZ) report ‘The Activist Investing Annual Review 2018’, activist action in Australia in 2018, though dropping off a little compared to 2016 and 2017, remains at elevated levels, with activity primarily being driven by occasional activists and concerned shareholders.
The report also notes that while 87 percent of publicly reported shareholder activism this year was mainly targeted at small, micro and nano-cap stocks, the success of Elliott Management Corporation’s campaign against BHP – which involved a demand by the US activist group for the Australian resources giant to unify its shareholding structure in order to deliver more than $22bn in value – suggests that activists could now focus on large-cap stocks.
What, then, are the factors driving activists to target Australian firms, large or small?
“Traditionally, Australia has not seen a lot of large-scale action from either domestic or international groups targeting boards,” says Francesca Boase, managing director at Edelman Australia. “However, the vulnerability of Australian companies at the end of a long commodities boom and the comparably low legal hurdles to shakeup corporate boards, make Australian companies natural targets.”
Drilling down, these targets include both underperforming companies and companies that are performing well. “Activists see either room for improved performance or an opportunity to benefit shareholders – which includes the activists themselves – more directly or in a shorter time frame, by increased dividends, sale of assets, followed by a return of capital to shareholders,” explains Mr Cowell. “That said, not all activist action is motivated only by short-term returns to the activists, though, in the end, that is their fundamental business model.”
According to Mr Cowell, three issues are common to the majority of shareholder activism: (i) poor price performance and poor share price performance when measured against comparative companies and market segments; (ii) ineffective or inefficient capital allocation or capital deployment, including sub-par returns on assets and capital; and (iii) poor corporate governance or board and senior management performance, commonly with underperforming, long term and entrenched directors.
To illustrate the widening scope of shareholder activism in Australia, such issues are increasingly being raised in environmental and social sustainability contexts. For example, non-government, not-for-profit environmental activist groups are receiving considerable support for their shareholder voting proposals from institutional investors, such as pension funds, index funds and ethical mandate investors.
“The vast majority of environmental, social and governance (ESG)-related shareholder activism in Australia involves climate change impacts, particularly greenhouse gas emissions, with human slavery and supply chain considerations also significant,” says Michael Chandler, corporate governance director Australia at Morrow Sodali. “Institutional investors encourage proposals for ASX-listed companies to enhance their disclosures and set hard targets around how they manage medium and long-term ESG risks and opportunities.”
As a response to shareholder demands, shareholders and corporate governance stakeholders in Australia are increasingly advocating the use of reporting frameworks such as the Global Reporting Initiative (GRI) standards and Task Force on Climate-related Financial Disclosures (TCFD) recommendations.
Activism in action
Examples of effective shareholder activism in Australia are not hard to come by – the Elliott Management pursuit of BHP and the revelations at finance company AMP being particularly high-profile examples. These two, as well as many others, resulted in board-level resignations and significant shifts in strategy.
“The Elliott Management attack on BHP resulted in both resignations and strategic changes,” affirms Mr Cowell. “For example, BHP has recently sold its US shale gas assets – assets which were underperforming on a return on investment (ROI) basis. BHP may say that it would have sold them anyway, however pressure from Elliott Management could be said at the least to have influenced that decision.”
In terms of the financial services industry, by far the biggest casualty of the uptick in shareholder activism in Australia has been AMP. In summary, in April 2018, an investigation by Australia’s Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry revealed that AMP had charged clients for financial advice which was not provided and also misled – some say lied to – the Australian Securities & Investments Commission (ASIC). These alleged transgressions quickly led to more than $1bn in market value being stripped from AMP shares.
As a result of the revelations, AMP faced the first shareholder strike ever recorded against a top 50 ASX listed company, in which 61.5 percent of investors voted against the company’s executive pay structure at its AGM. The fallout included mass board and executive resignations, including the chairman, chief executive, general counsel and several directors.
“What is particularly interesting about this, as well as the Elliott campaign against BHP, is that the activism was public but also focused on reputational, governance and cultural issues with the board,” says Ms Boase. “This could be a foreshadowing of where Australia is heading – away from small-scale, private, financial incentive-based shareholder activism of the past. This new style of activism, which has been imported from the US, is louder, larger-scale and played out on the streets and in the media, not just the boardroom.”
Shareholder activism in Australia is no longer conducted behind closed doors as it once was. A more direct approach is now the order of the day and a shakeup of the Australian corporate status quo is the result.
“Shareholders are more empowered than ever,” believes Ms Boase. “This presents a new challenge for boards and business leaders. Digitalisation is giving retail shareholders and activist investors more control and galvanising power than ever before. In addition, proxy solicitation outreach has been made simpler and more accessible, making campaigning that much easier. Social media is quickly becoming a stakeholder engagement platform of choice to deliver targeted messaging to specific retail shareholders, with minimal cost.”
With shareholder activism levels unlikely to subside anytime soon, this elevated activist interest is considered by some to be a good opportunity for companies to improve. “For boards that are paying attention to the impact of increasing shareholder activism, the environment is providing impetus to examine their company’s performance more closely,” suggests Mr Cowell. “They must carefully watch their shareholders register and analyse who is on or coming on to the register and why. They must maintain an effective level of communication with shareholders to explain company strategy and what they are doing, especially in areas that could lead to activist interest.”
In order to achieve this, a rigorous and ongoing review of board composition and the selection process is desirable. Also useful is the development of a playbook that outlines the strategies that typically feature in a shareholder activist campaign. “Activists are sometimes only self-interested,” suggests Mr Cowell. “But frequently they have done a lot of homework on a company and its market and they have proposals that should be seriously considered. Boards should be ready to engage with activists rather than have an automatic rejection reflex. Activist fights are extremely time-consuming and expensive, and they divert boards and management from their tasks of governing and managing a company.”
From an AICD perspective, shareholder activism should be characterised in terms of its impact on a company’s sustainable, long-term value creation and its interests as a whole. “Some activist approaches can be beneficial – they can push improved governance practices, disclosure and capital allocation,” says Ms Petschler. “On the other hand, single-issue activism can be a negative distraction for companies and detract from long-term value creation. The most important thing for boards is to maintain a considered, informed and reasoned view – consistent with the high expectations and duties both the law and the community place on directors.”
In the view of Mr Chandler, future shareholder activist campaigns in Australia will be characterised by combining bottom-up value considerations that critique operating and financial company performance, with top-down corporate governance considerations that relate to scrutinising the oversight capability of non-executive directors. “This balanced messaging strategy equally resonates with both institutional portfolio managers and proxy voting committees,” he believes.
Australia is an increasingly attractive environment for shareholder activists and a mainstream area of focus for boards and senior executives. “Activism is not always aggressive, confrontational or critical,” says Ms Boase. “Shareholders are demanding that board and senior management have deeper and more meaningful engagement with investors, as well as more transparency. Successful Australian companies will be the ones that rise to the challenge.”
All in all, with activist action at elevated levels, Australia has awakened to the potential for change and seems set to take its place on the global map of shareholder activism.
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