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Why shareholder activism is hotting up

10 November 2016
The Times

A series of recent news stories are keeping the spotlight on shareholder activism and the development of that investor class in the last few years. These include the continued scrutiny of affairs at Sports Direct, with the Pensions and Lifetime Savings Association (PLSA) warning that arrangements between the company and founder Mike Ashley's brother were "yet another unseemly detail at a company where there are already serious concerns," and shareholder anger at Australian stock exchange-listed law firm Slater & Gordon's proposed remuneration report and bonus structure, with a substantial minority of investors voting against at its AGM last week following financial losses suffered on its UK acquisition of Quindell. The continuing fall-out from the Brexit vote, especially for currency markets, is prompting high levels of interest in UK plc from overseas activists in particular.

A decade or more ago, the level of shareholder intervention in the affairs of public companies in Britain was fairly minimal and, as a generalisation, relied heavily on following at AGM's the recommendations of institutional shareholder representative bodies such as the Association of British Insurers (ABI) and the PLSA (then known as the National Association of Pension Funds (NAPF). Institutional share ownership tended to be much less global, with British investors typically expressing any 'outrage' in the national manner parodied by Victoria Wood – saying "tut" (privately or occasionally publicly) and shrugging shoulders.

The current environment is very different, with the trend for quoted company shareholder activism ever on the increase, prompted by numerous factors such as a more globalised investor base, greater regulatory emphasis on shareholder stewardship and corporate governance, and market volatility, especially since the financial crisis of 2007. Shareholder activists launched more campaigns in 2015 than in any previous year on record and this trend showed no sign of slowing in 2016. The so-called 'shareholder spring' of 2012, which saw a series of high profile refusals by investors to support executive pay proposals perceived to be disconnected with business performance, was only one manifestation of greater enthusiasm by shareholders to scrutinise and challenge management. The 2016 AGM season has continued to reflect this hardening mood.

However, the expression 'shareholder activism' is about much more than executive pay, with investors adopting various strategies to achieve a wide range of objectives not all of which may be concerned with a company's long-term prosperity, from individuals or non-profit companies pursuing social agendas or corporate governance changes (board representation or greater diversity) to multi-billion dollar hedge funds seeking to profit from strategic or financial changes in the company (improving shareholder returns or efficiency of capital structures) or influence a proposed takeover or non-core divisional spin-off transaction.

Many of the emerging activist strategies originate in the US which still accounts for some two-thirds of companies targeted globally by activists. There (and increasingly in the UK) activism has gone from being an obscure group of shareholders agitating for change at lesser performing companies to becoming a distinct, mature asset class that institutional investors look to in order to balance their portfolios. The activist hedge funds representing this asset class will target companies in which management may be perceived as lacking enough incentive or pressure to maximise shareholder value and build a large enough stake to be able to effect governance and strategic change to enhance value.

Traditionally in the UK, shareholder activism has been less adversarial than in the US, where there has been a tendency to engage in aggressive public campaigns to build pressure on management. UK investors have been more likely to approach a company’s senior figures directly and privately to try to achieve a negotiated consensus. Non-UK shareholders are typically more willing to use the full toolkit available. These tactics will depend on their ultimate goals and voting stake, but may include:

  • approaching a company’s board privately to voice concerns/demand change/threaten action;
  • the use of public platforms, including press and social media to raise concerns or garner support from other shareholders ahead of general meetings;
  • acquiring a large enough voting stake that they can, alone (with 5%) or together with others (100 shareholders), requisition a general meeting (providing a platform to voice concerns or propose a resolution) and/or propose, carry or block resolutions, such as the appointment or re-appointment of a director, the terms of a director’s service contract, or the directors’ remuneration report.

There is plenty of evidence that the distinctions between the traditional UK and US approaches are breaking down. This is likely to accelerate, with UK companies evidently now more exposed to non-UK activist shareholder focus after the Brexit vote in June created market volatility and prompted share price falls for the largely domestic FTSE-250 mid-cap index and a currency slide for sterling. London-based industry monitor Activist Insight reports that most of the 27% increase in investment by activist investors in British companies between June and September this year originated abroad, and a number of such activists have made no secret of their expectation of further UK opportunities post-Brexit.

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