Shareholder activism often attracts a bad press. Depending on whose side a journalist’s sympathies lie, directors are portrayed as belligerent, barely competent and money-obsessed; investors as aggressively interfering, short-termist and money-obsessed. Yet, as practitioners know, the truth is often much less headline-grabbing.
Tactics for averting hard-edged activism
Most active shareholders prefer to work behind the scenes, making representations to company boards about how things look from the perspective of those with capital at risk.
Boards are usually interested to learn how their strategy and achievements are judged by interested parties outside the boardroom. And, usually, directors and shareholders have a common interest in the long-term success of the company.
Ironically, it seems that there are not enough truly active owners (rather than active traders) of company shares. Companies have made great strides in the last decade or so to improve their communications with shareholders.
The best annual reports and web sites give the reader a clear sense of the business, its performance and its prospects. Reporting on how the relevant corporate governance standards have been applied has become more discursive and informative.
And leading companies will actively seek input and feedback from major shareholders on key issues for the company.
Two-way transparency
But many directors express frustration that shareholders do not return the effort. It seems that stewardship, the age-old concept of diligently managing assets entrusted to one’s care by a third party, is still not practiced by enough institutional investors.
Even those investors expending resources on governance appear to spend more time talking than taking action. This is disappointing because the “comply or explain” model of governance only works if there is intelligent oversight of companies by share owners.
One of the reasons there is still widespread scepticism that stewardship adds value is that too many practitioners and commentators confuse the activity of voting at company meetings with the action of stewardship.
Voting is an important “care and maintenance” activity. The discipline of reviewing a company’s performance and governance at least annually is useful but it is difficult to make the link to shareholder value.
Shareholder activism, when it is done well, is about getting constructively involved with a company on issues where share owners have a legitimate role. It is increasingly evident that UK values are setting a global standard poised between Europe and the US.
It is not just about claiming scalps of chief executives and chairmen. Just as often it is about appointing additional directors. It also involves questioning the board on its strategy in order to check that it is sensible and deliverable.
It is about supporting management to deploy financial resources on profitable projects that give the company a sustainable future, rather than pushing them to follow the latest fad. It is about making sure that remuneration structures incentivise directors to achieve goals that add long-term value for shareholders. It is about taking action, rather than idly sitting by watching a company gradually drift into decline.
A future of engagement
So where do we go from here? We need more and better shareholder interaction with boards and management. Investors need to get more involved in the appointment of directors.
In some markets, mechanisms need to change so that the board is fully and genuinely accountable to the owners.
The trend for greater participation outside one’s home market seems set to continue. If it makes economic sense to be actively involved in domestic companies, it has to make sense to get involved in the companies you invest in abroad.
This will lead to another trend, namely, greater consultation between investors internationally. Most long-term owners have limited resources to dedicate to stewardship activities. Working together, or pooling those resources, means you get maximum bang for your buck.
There is still concern in certain quarters that shareholder activism means shareholder primacy, which arguably does not fit the more socially-orientated economic models in many European countries.
Yet, it is in the public interest that owners be intelligently involved in the companies in which they invest.
Our objective is to facilitate the agglomeration and focus of as many institutional investors as possible. This mitigates the barriers of cost involved in collective action.
In any case, “the public” is very often the investor through pension schemes and other long-term savings. Improved understanding of this dynamic will lead to greater recognition of shareholder activism as a positive economic force.
For investor relations professionals, the future will be in acting as a conduit for shareholder views into the boardroom. Insight into who the share owners are and what motivates them will help boards get their message across.
Ensuring that the board knows about and deals with share owners’ concerns will help avert the type of shareholder activism that we read about in the press. Thus, investor relations professionals will make a key contribution to long-term value creation by companies for their owners and the common weal.
Robert A G Monks is the publisher of www.ragm.com, a source of global corporate governance information. He is board chairman of Governance for Owners (www.g4owners.com), a share-ownership services venture and is also the founder of Lens Governance Advisors, a law firm that advises on corporate governance in the settlement of shareholder litigation
When do investors become activists?
Two fund managers, a corporate governance guru and a private investor explain why they intervene in companies and what they want from IROs.
William Claxton-Smith
Director of investor responsibility,
Insight Investment
Rather than waiting until there is a problem, we routinely engage with the chairmen of companies that we have invested in. Sometimes chairmen are a bit surprised because they just want to talk about ticking the boxes with regard to the [UK] Combined Code.
But that’s not what we are trying to do. These discussions are complementary to the routine communication that institutions are already having with executive management. If we vote against something at the general meeting, which fortunately we rarely do, it’s probably a failure of engagement.
One problem with engagement is the lack of communication within companies between those who look after the executives and non-executives. We’re never sure who is responsible. If we want to meet the chairman, sometimes the IR team says: “It’s nothing to do with us; you’ll have to speak with the company secretary.”
A few years ago, every board would have pooh-poohed the idea of institutions meeting with independent directors. A number of firms are now arranging for investors to meet with the whole board.
Terry Bond
Private investor and director,
ProShare
Companies think private investors are going to cause trouble by asking difficult questions at the AGM. But the average private investor holds a share for about seven years - and all he wants is to be kept informed.
I’m not in favour of private investors rattling the cage. Companies should be left to run their activities themselves as long as they keep the private investor informed. But annual reports are filled with weasel words, while annual meetings are about as attractive to go to as a funeral of somebody you don’t know.
And I hate the attitude that “private investors are more trouble than they’re worth because it’s too expensive to service them.” That argument is rubbish in the internet age.
If IR people communicate, then there won’t be a need for shareholder activism. When I buy a US share, I get a letter from the chairman saying, “Welcome to our club”, and I get a newsletter every quarter. The other day I got a lovely magazine from the tiny AIM-listed Telford Homes telling me about what they do. Fantastic! As long as I’m informed, I’m happy.
Christian Strenger
Chairman,
International Corporate Governance Network (ICGN)
Direct communication wasn’t always so easy. Shareholders had to make quite an effort to reach company executives in the early nineties; now most companies are keen to talk to them.
Shareholders should only intervene when the business has been operating below par for longer than is acceptable – that is not less than one year and probably two to three years. Shareholders should have patience with strategic developments.
At DWS Investment, where I am a board member, we prefer to intervene directly with companies. Only if that comes to nothing do we then approach the media and use general meetings as sensible means to achieve change.
The IR effort must facilitate investor access to information and the management. But IR should not interpret company strategy – that would be overshooting its responsibilities. It should get people together and provide the relevant information. But policy and strategy are for the top management.
Hedge funds are making life more intensive for German companies. Describing them as locusts misses reality, as they are active shareholders who have a great variety of goals. Some are very short-term and add to market liquidity, while others try to influence strategy in their and the company’s interest. The ICGN is about leading by example, asking for and providing solutions that are doable and traceable.
Karina Litvack
Head of governance and SRI,
F&C Asset Management
The type of engagement we do is rarely confrontational – it’s working in partnership with companies to bring about results that companies acting alone would have difficulty achieving. We are committed to long-term ownership. And we define corporate governance quite broadly.
We’ve been particularly active in the areas of corruption and business ethics. We emphasise the importance of strong internal reporting. We have commissioned expert research and sponsored the publication of an international “how-to” manual.
We write to companies where we think it’s particularly relevant, hold workshops and have one-to-one discussions.
We do alert companies that non-traditional questions will be asked. We write to company secretaries before the peak voting season to advise them of the issues they can expect to hear from us about. Company secretaries are often our first point of contact but sometimes IR will be the entry point. In truth, IR often recedes from the discussion.
It’s important for IR to become familiar with the widening range of investor concerns. We are accountable to someone who is telling us that we need to be more active, rather than less. We have to ask more questions in order to demonstrate that we are not asleep at the switch.
As there’s more expectation on the part of shareholders that they are entitled to dialogue, failure to engage will be made more public.
Lessons from the coalface
The following four companies have borne the brunt of shareholder protests. How did they respond?
Eurotunnel
After just three months in the job, Xavier Clément was unprepared for the events that unfolded at Eurotunnel’s 2004 AGM. Before he had time to “assess all the issues”, he says, the notorious shareholder activist Nicolas Miguet led a revolt that managed to oust Eurotunnel’s entire board.
By the time of the next AGM, in June 2005, Miguet was threatening to cause trouble again. But Clément was determined to limit the activist’s influence. Working with chairman and CEO Jacques Gounon, who had been elected in the previous year’s coup, he says he wanted to show the company’s creditors that there was unity among investors for a debt-restructuring plan.
Clément planned a campaign “based on the principles of The Art of War by Sun Tzu”, bringing together proxy solicitors, PR specialists and the IR team. “Our first job was to get initial estimations of where the votes were,” Clément says. “It is very important to know very precisely who is going to support your project so you can plan and allocate your resources efficiently.”
Clément then set about building a “mass communications strategy”, which included profiling every retail shareholder and their likely voting intentions, and sending out a tutorial package that showed shareholders exactly how they could use their proxy vote.
“At every stage of the process I tried to stress that the company could not afford more changes,” Clément says.
One crucial part of the campaign was to “chase every vote”. By the end of the three-month process, Eurotunnel had telephoned about 30,000 shareholders, according to Clément.
“We developed a very efficient reporting system, so we could chase every vote all the way down the chain,” he says.
On the institutional side, Clément says he was on the road for more than two months: “I met with about 100 institutions, including the corporate governance managers, portfolio managers, and securities lending managers. It’s very important to see all three, I think, since corporate governance and securities lending matters count.”
The total cost of the project, which Clément describes as something akin to a political campaign, was the “equivalent of posting a letter to each of our 800,000 shareholders”. Clément certainly thinks the money was well spent. “As a result of winning the vote, we are putting what happened last year behind us.”
Deutsche Börse
By German standards, the shareholder revolt at Deutsche Börse earlier this year was something of a neutron bomb. Rarely had German managers come under such sustained assault.
At first, Deutsche Börse’s then-chief executive, Werner Seifert (right), and chairman Rolf Breuer, had dismissed Children’s Investment Trust (TCI) when it had expressed unhappiness over the Börse’s proposed £1.4bn bid for the London Stock Exchange (LSE).
Seifert said he couldn’t see the need for an open shareholder vote on the matter. But six months later, the bid had been withdrawn and TCI had managed to oust Seifert as well as Breuer, one of Germany’s most respected bankers. Though TCI’s stake was relatively small (about five per cent), the previously little-known hedge fund also managed to line up Atticus Capital, Merrill Lynch and Fidelity on its side.
To some in Germany, the man behind TCI, Chris Hohn, represents an unwelcome new breed of hedge fund managers out to cause trouble for German companies. Known for his bullish style, Hohn is said to have fired off dozens of aggressive e-mails to Seifert in an effort to get his way.
Breuer and Seifert have criticised the influence of foreign hedge funds. Over several months, the pair traded insults with Hohn in the press: Hohn insisting that the LSE transaction was too expensive, Seifert and Breuer accusing Hohn of damaging Deutsche Börse by making “a public spectacle.”
German corporate law did not require Deutsche Börse’s management to consult with shareholders over a bid for the LSE. That a hedge fund could force it to do so demonstrates a new reality, according to Oliver Linde, managing director of corporate advisory at Georgeson Shareholder.
“It was a big shock to them. They found themselves totally underprepared,” he says.
Deutsche Börse is not the only company in the region that has recently come under shareholder assault. IWKA, a German automotive systems supplier, was targeted by maverick US fund manager Guy Wyser-Pratte. His fund took a 6.3 per cent stake in IWKA, and after a long trial of strength, he managed to oust its chief executive, Hans Fahr, at this year’s AGM.
This trend has other companies looking over their shoulders. Instead of dismissing the likes of TCI, they are now forced to consult with them. What’s more, IR teams are doubling their efforts to make sure they know exactly who their shareholders are, and exactly what they are likely to do.
Wyevale Garden Centres
UK garden centre chain Wyevale is facing a shareholder revolt led by Laxey Partners, an active hedge fund based in London and on the Isle of Man.
The fund is led by the combative and secretive Colin Kingsnorth, whose strategy is to find poorly performing companies, take a stake in them and then try to get rid of the board.
Even if he fails to take control – as was the case with his approach in 2003 for British Land – he hopes media and stock market interest will help drive shares higher.
Laxey, which in mid-November 2005 held 28.3 per cent of Wyevale, is unhappy about its performance under the chairmanship of David Williams. Laxey wants to replace Williams with Robert Ware, a former executive of business park owner MEPC. At one point in the battle, during the summer of 2005, Laxey said that Williams was “unfit to run a garden shed.”
The hedge fund lost out in the first round of its fight. Its proposals to remove Williams and other directors were narrowly voted down at an EGM in September.
Although Laxey could still get its way, the EGM was an example of a company successfully holding its line against a powerful activist shareholder – in this case one that owned more than a quarter of its stock.
The fact that Wyevale won wasn’t a matter of chance, according to Cas Sydorowitz, managing director of corporate advisory at Georgeson Shareholder, which acted as a proxy solicitor for the company. Georgeson had the job of rounding up votes ahead of the meeting, identifying those likely to vote and contacting shareholders.
Sydorowitz says the result of the voting was unclear throughout the run-up to the EGM. “I didn’t know what was going to happen until the day of the vote. It was literally down to the wire,” he says. Sydorowitz believes Laxey failed because it didn’t present a compelling case to other shareholders. “Laxey didn’t really explain to shareholders what their strategy was,” he says.
Sydorowitz says Wyevale also learned to play the media game, employing the services of financial PR firm Financial Dynamics: “There was a constant feed of stories. There was some news every day. Part of that was the media themselves – it was a hot story. But Wyevale was feeding it as well.”
Sydorowitz points out that there are many types of shareholder activism and that activists’ motives can be quite diverse. In one category are funds like Laxey and Knight Vinke, which caused problems for both Shell and Suez. Their intention is to “unlock value” in large, unwieldy enterprises.
Another group are activist shareholders with more personal ambitions, for example, a love of the media limelight – or even political hopes. It is said that Frenchman Nicolas Miguet, right-wing provocateur and convicted fraudster, is using his continued fights with Eurotunnel as a platform for a run for the French presidency.
British Energy
In September 2004, British Energy (BE) decided to de-list its shares rather than face the prospect of defeat by rebel shareholders. The nuclear power company, which generates about a fifth of UK electricity, felt it had no another option after a fierce campaign brought by one its shareholders, Polygon Investment Partners, a hedge fund based in London and New York.
BE was privatised by the UK government in 1996 and its share price prospered for a number of years until falling electricity prices hurt the company hard. In 2003, the company agreed a £5bn restructuring plan with its creditors.
Unhappy about the terms of this deal, Polygon, which now owned more than five per cent of BE, requisitioned an EGM last year to voice its concerns. With rising energy prices, Polygon argued that the deal represented poor value for money for shareholders. Under the terms of the restructuring package, they were to receive only 2.5 per cent of shares. Polygon wanted a greater amount of equity for shareholders.
In response, BE took Polygon to court claiming that, unbeknown to US regulators, the hedge fund had been working in concert with another fund, Brandes Investment Partners, and had failed to disclose the fact that it had exceeded a five per cent share-ownership threshold for almost two months.
BE argued that Polygon’s proposals would have resulted in creditors forcing the company into liquidation or pursuing compensation through the courts. It estimated that costs could reach as much as £1.5bn and that it didn’t have the resources to foot such a big bill.
Seeking a de-listing was hardly ideal for BE but its managers said it was the least-worst option for the company in the face of Polygon’s assault. If the EGM had gone ahead, BE faced the prospect of Polygon and Brandes blocking management from carrying out the de-listing at all. A manager at BE describes the battle with Polygon as “something we needed to get through.”
Understandably, the press was fascinated with the story. One internal consideration was how much of a debate the company should have in the public domain. BE’s managers instinctively wanted to try to keep its negotiations behind closed doors.
But the press was demanding comment and, although Polygon was unwilling to talk directly to the media, it was employing a high-profile PR firm to tell its side of the story.
Another issue was the sheer number of groups that needed to be kept informed – shareholders, creditors, the UK government, other regulators and staff. All this amounted to a highly complex case.
Driven to action
Eight flashpoint issues that have mobilised European shareholders.
“Fund manager pushes for cap on major shareholding”
Country: UK
Company: BSkyB
Activist: Insight Investment
Point of conflict: The UK Takeover Code disbars a shareholder owning between 30 and 50 per cent from increasing its stake without making a full bid for the company unless a majority of shareholders have waived this requirement – the so-called Rule 9. In July 2004, BSkyB announced its intention to return surplus capital to shareholders (and waive Rule 9 in the process). The effect was to increase NewsCorp’s shareholding. Insight engaged with BSkyB.
Result: BSkyB is now proposing to buy back five per cent of its issued capital and will limit NewsCorp’s voting rights to the level held at its AGM in November 2005 – expected to be 37.2 per cent.
“Underperformance and questions about corporate governance”
Country: The Netherlands
Company: Royal Dutch Shell
Activist: California Public Employees’ Retirement System (Calpers).
Points of conflict: Lots of them – including the fact that the stock in 2004 had underperformed its peers for five years; that Shell had twice restated its oil reserves that year; and that Calpers wanted shareholders to be able to nominate board members.
Result: Calpers added the company to its 2004 company list for poor financial and corporate governance performance.
Effect: Shell responded to much of Calpers’ criticism of its management structure and accountability. By November 2004, Calpers praised Shell for “turning the corner with improved corporate governance.”
“Board blamed for debt”
Country: France
Company: Eurotunnel
Activists: Publisher Nicolas Miguet, who had been convicted for fraud and forgery; French campaign group ADACTE; and Jacques Maillot, who was founder and former chairman of travel firm Nouvelles Frontieres.
Point of conflict: Debt was crippling both revenue and share price in 2004.
Result: Entire board was toppled at Eurotunnel’s 2004 AGM. Observers likened the event to a mass rally for Miguet. In December 2004, Gounon became chairman. At the 2005 AGM, Gounon was backed by 82,000 (45 per cent) of the share capital vote to remain in the post.
“Minority shareholders angered at low takeover price”
Country: Spain
Company: Telefonica
Activist: Accter, the association of Terra shareholders.
Point of conflict: Terra Lycos, a spin-off of Telefonica, was floated in 1999 at the price of EUR11.81 per share. After the dotcom crash, Terra’s share price slumped. When Telefonica sought to buy it back, hundreds of minority shareholders were angered. The 2003 takeover at the price of EUR5.25 per share was approved by majority shareholders in Telefonica and Terra. Telefonica has plans to de-list the stock.
Steps taken: Minority shareholders formed Accter and took Telefonica to court. A decision has yet to be reached. Accter also filed a complaint against BBVA (a principal shareholder of Telefonica) with the stock market commission and went on to take the market regulator to court.
Effect: Accter has gone on to form Accionis – a body representing the interests of minority shareholders in Spain.
“Chairman shouldn’t be member of executive”
Country: Switzerland
Company: Nestlé
Activist: Ethos, a Swiss social activist investor.
Point of conflict: The merging of board chairman and CEO roles earlier this year was the sticking point. Ethos proposed amendments to the articles of association preventing the chairman from being a member of the executive board at the same time. The investor also opposed CEO Peter Brabeck-Letmathe from becoming the vice-chair of Credit Suisse, saying he had too many responsibilities at Nestlé to represent shareholders at another company.
Result: Ethos’ amendment wasn’t successful but did attract a 35.94 per cent vote and a lot of media attention. The Nestlé CEO was elected board chairman in April 2005. He resigned as vice-chair of Credit Suisse.
“Italian lobby invests to highlight corporate governance”
Country: Italy
Companies: Most of the top listed companies in Italy, including Autostrade, MediaSet, Pirelli, SanPaolo IMI, Snam and Telecom Italia.
Activist: Assogestioni, the Italian asset management association.
Steps taken: Assogestioni has drawn attention to the need for better corporate governance by buying shares in the top firms, and attending and speaking at their AGMs. As quick to praise as to criticise, in August 2005 the association commended the “inspirational” corporate governance adopted by Enrico Bondi at Parmalat.
Result: Watch this space.
“Investor body unhappy with hostile bid”
Country: Sweden
Companies: Old Mutual; Skandia.
Activist: Aktiespararna, Sweden’s shareholders’ association.
Steps taken: Aktiespararna is campaigning against Old Mutual’s current hostile bid for investment firm Skandia and calling for the resignation of the three board members supporting the bid.
Result: Still early days. Aktiespararna is starting to collect proxy votes from Skandia’s shareholders in case an EGM is called and it needs to defend its position.
“Takeover bid too high”
Country: Germany
Company: Deutsche Börse
Activists: Christopher Hohn for hedge fund Children’s Investment Trust (TCI), Atticus Capital, Standard Life, Fidelity Investments, Merrill Lynch and others.
Point of conflict: TCI and its supporters believed that Deutsche Börse’s bid for the London Stock Exchange was too high.
Result: The bid was withdrawn in March 2005. Deutsche Börse CEO Werner Seifert was removed, as was supervisory board chairman Rolf Breuer.
Effect: Shareholder activism became an election issue in Germany when SPD head Franz Muntefering called hedge funds “swarms of locusts that fall on companies, stripping them bare before moving on.”
Jargon buster
CFDs: short for “contracts for difference”. Hedge funds use CFDs in the UK to avoid paying stamp duty on the shares that they trade. CFD holders do not have to declare themselves to companies, making it difficult for companies to track who is moving their share price.
Proxy solicitation: the process of gathering shareholder votes and support for shareholder resolutions. The solicitation process involves identifying shareholders, working out the message you want to get across to them, and communicating it in a compelling way.
Combined Code: the set of recommendations covering corporate governance in the UK. Breaches of governance best practice have been the catalyst for many instances of shareholder activism.
EGM: extraordinary general meeting. Activist shareholders can call an EGM to seek approval from other shareholders for a proposal such as, in the case of Wyvale, the removal of directors (see page eight).
Televoting: a technique pioneered by Georgeson Shareholder for telephoning investors ahead of a resolution to ensure that a company makes its case to all potential voters, increasing the chance of a favourable outcome.
SRI: socially responsible investment. This expanding breed of funds is leading more activism over social and environmental issues.
Shareholders’ rights: the European Commission is looking to increase investors’ ability to vote in abstentia and to table resolutions across the European Union. For more details, visit europa.eu.int.
Section 212: a section of UK Company Law that obliges shareholders to identify themselves to the companies in which they invest. The lack of an equivalent rule in continental Europe can make shareholder identification difficult.
E-voting: systems that allow investors to vote on resolutions via the internet. Former Gartmore head Paul Myners pushed for greater use of e-voting by FTSE 350 companies in a recent report.