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Shareholder activism in Australia - as seen in Equity Magazine

By Gabriel Radzyminski, Managing Director and Portfolio Manager at Sandon Capital
First published in September 2016 Equity Magazine

Shareholder activism is well established as an investment strategy in North America and Europe, yet remains in an embryonic form in Australia. An activist investor is one who buys shares in a company with the express intention of using one or more of the tools at their disposal to effect positive change at the company for the benefit of all shareholders.  These tools can range from targeting underperforming boards and management to suggesting capital management or corporate transaction initiatives.

I believe shareholder activism is best applied when shareholder value is being destroyed as a result of persistent failures by a company’s board and management in one, or a combination of three areas: (i) strategy; (ii) governance; and (iii) capital management. As part-owners of a company, shareholders have rights and I believe all shareholders should actively use those rights, where appropriate, to bring about the changes necessary to maximise shareholder value.

The influence that shareholder activists are having in offshore equity markets has never been greater. Globally, company boards are increasingly aware of and are being subject to shareholder activism on many fronts. The value created and investment returns derived from activist investing are seeing increasing amounts of capital allocated to the strategy.

According to Activist Insight, funds managed by investors with a primary focus on activism totalled US$180bn at 30 June 2016.  Since 2010, this number has more than tripled, highlighting the strong interest in activist investing, particularly in the Northern Hemisphere. 

Funds Managed by Investors with a Primary Focus on Activism

Source: Activist Insight

Compared to many countries, Australia has a conducive environment for shareholder activism due to:

  1. A large and rapidly growing pool of superannuation savings
  2. One of the most shareholder-friendly regulatory frameworks in the world
  3. An institutional shareholder base that has historically been very passive

Each of these attributes is discussed in more detail below.

1. A large and rapidly growing pool of savings

Australia has the fourth largest pension savings pool in the world, at approximately A$2 trillion, with a forecast to be circa A$6 trillion by 20351. Government, industry and corporate funds account for two-thirds of the market, with self-managed superannuation funds (SMSFs) making up the balance.

Historically, Australia’s institutional investors have largely avoided allocating funds to Australian activist investors. With the growing awareness of the value created and attractive investment returns available2, I expect Australia’s institutions to increasingly support activist campaigns and allocate funds to this investment strategy.

2. A shareholder-friendly regulatory framework

Australia’s Corporations Act (2001) is possibly the most shareholder-friendly legislation in the world3. Important aspects of this legislation are those that provide shareholders with rights to affect the composition of the board and the agenda of general meetings. In broad terms, a shareholder (or group of shareholders) owning more than five per cent of the issued capital of a company can:

■ Call for a general meeting

■ Put forward shareholders’ resolutions

■ Require the company to distribute a shareholder statement

■ Seek the removal of directors

■ Nominate directors

Using the shareholder rights granted by the Corporations Act is the public face of investor activism. The reality is that most activism takes place behind closed doors and it is a tactical decision if and when activists move the engagement to the public arena.

3. A passive institutional shareholder base

The opportunity for activist investors to generate superior returns in the Australian market is assisted by the passive indexation and benchmark-aware investment styles adopted by many institutional investors. As a general rule, institutional shareholders will typically hold an underweight position, or no position at all, in a company where persistent failure by the board and management results in shareholder value being destroyed. Even when the board of an underperforming company is confronted, most investors have little appetite for pursuing real change. These situations often provide fertile hunting grounds for activist investors.

Pioneering activist investing in Australia

Provocatively, if company boards were performing their role there would be no opportunity for activist investors4.  When companies persistently fail, they generally do so because of a failure of one, or a combination, of the following areas of broad responsibility of the board – strategy, governance and capital management. The majority of company boards perform their role with distinction and activist investors typically only come into contact with companies that are failing in these areas. In the context of the overall market, they are relatively few in number.

Our aim in any activist campaign is to have influence over the company that is proportionately greater than our economic investment. After formulating a strategy, we will usually engage with fellow shareholders to gauge their likely support for the changes we believe are necessary.  The Australian Shareholders Association (ASA) can be an important constituent in this process.  When the ASA represents a large number of shareholders and holds a significant amount of proxies, the holding can be influential on voting outcomes at Annual and Extraordinary General Meetings.  As such, we always look to engage with the appropriate ASA company monitor as part of our activist campaigns. 

If we are able to convince fellow shareholders of the merits of our thesis and boards see there is broad support for the changes that we are proposing, a negotiated agreement usually prevails. The canvassing of our proposition will typically assist us in refining the proposal, thereby lessening the implementation and execution risks.

Preserving and/or realising value for all shareholders

Activist investing today is significantly different from the ‘corporate raider’ days of the 70’s and 80’s when the protagonists employed techniques such as greenmail to enrich themselves at the expense of other shareholders. The activist techniques devised and implemented seek to benefit all shareholders equally. 

I believe that momentum for shareholder activism in Australia will continue to build rapidly from its current low base.  The large and rapidly growing superannuation pool, the shareholder friendly regulatory environment, the largely passive institutional shareholder base and the attractive investment returns on offer will combine to ensure that activist investing in Australia will become a well-established investment strategy like it is in the Northern Hemisphere.

Footnotes

  1. Superannuation assets totalled A$2.03 trillion at the end of March 2016, according the ASFA, the peak industry body (www.superannuation.asn.au/resources/superannuation-statistics).  Superannuation assets are forecast to grow over the next 20 years to more than $6 trillion (http://www.supersystemreview.gov.au/content/downloads/final_report/part_one/Part_1_Overview_Recommendations.pdf).
  2. There are many academic studies that cite the investment benefits of activist investing. One example is “Long-Term Effect of Hedge Fund Activism”, December 2014, Columbia Law Review www.columbia.edu/~wj2006/HF_LTEffects.pdf 
  3. Corporations Act 2001. www5.austlii.edu.au/au/legis/cth/consol_act/ca2001172/
  4. We’ve taken the liberty of paraphrasing a quote “If boards were doing their job, there’d be no need for activists” by Professor David Beatty in an interview for McKinsey & Co’s Insights series entitled: Are You Getting All You Can from Your Board of Directors? www.mckinsey.com/insights/corporate_finance/are_you_getting_all_you_can_from_your_board_of_directors

SUCCESSFUL CAMPAIGNS

BlueScope Steel Ltd (BSL):  Sandon Capital publicly released its analysis in mid-2015 and then engaged with the company and other shareholders.  Despite difficult conditions, management at BSL have done a laudable job of improving value through restructuring operations and sensibly deploying capital, and this has led to the share price increasing by >150% since we initially released its presentation.

Onthehouse Holdings Ltd (OTH):  We campaigned in late 2014 for substantial board change, including appointment of Sandon Capital and other nominees to the board. In mid-2016, OTH entered into a scheme implementation deed with a Macquarie-led consortium to be acquired at a substantial premium.

Alchemia Ltd (ACL):  We campaigned for substantial board change in mid-2015. The new board negotiated the sale of the company’s main undertaking and cash proceeds were returned to shareholders via a capital return, which was significantly above the prevailing share price when we first acquired its stake.Shareholder

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