By Jeremy Leibler – Partner at Arnold Bloch Leibler
While the impact of shareholder activism in Australia hasn’t yet been as seismic as predicted, its steady increase, growing sophistication and the breadth of companies being targeted is transforming our corporate landscape.
In October 2016, Arnold Bloch Leibler released the first-ever detailed analysis of activist investing trends and insights in the Australian context. Based on the firm’s experience in advising both activist investors and non-executive directors in responding to activist demands, we commissioned global data specialist Activist Insight to undertake the research.
Its report found that at least 50 Australian listed companies a year had received a public demand from investors since 2013 and activists had won 113 board seats – or around two-fifths of the total sought.
While the vast majority of equity activism in Australia (86 per cent) had been locally driven, we were squarely on the radar of major global activists looking to diversify their portfolios beyond the US.
And while the analysis indicated that Australia’s limited capital pool had targeted the smaller end of town, with 85 per cent of activist attention focussing on companies with a market cap of less than AU$331million, the data only tells half the story.
The report pointed to high-profile cases that had hit the headlines, such as Brickworks and Antares Energy, while explaining that activists were still exerting most of their muscle behind the scenes. Fast-forward 12 months and the Australian business media is rife with stories of under-performing boards being put under intense pressure by increasingly savvy activists.
Major strategic announcements, which we’re now seeing on a regular basis, have been triggered by pressure from activists, including asset disposals at top-50 companies. Which is why every competent ASX 200 board is preparing its company and management team for this potential and the inevitable consequences to business operations and reputation,
A market ripe for the taking
Boards that are not anticipating and preparing for activist activity are ignoring the legal and structural reasons why the Australian market is so conducive to it. Features of Australia’s regulatory framework that make it ripe for activism include:
- The ‘two strikes rule’ that allows just 25 per cent of shareholders to vote down a company’s remuneration report and, ultimately, spill the board of directors (there is no such tool for activists in the US)
- The relatively low threshold (five per cent of issued equity) required to call an extraordinary general meeting
- Recent amendments to regulatory guidelines, clarifying that shareholders can communicate with each other about company performance
- The relatively high degree of institutional shareholdings due to the large superannuation fund pool
The equally influential flipside of this regulatory incentive is the lack of regulation over proxy advisers in Australia, which has emboldened activists and provided them with disproportionate control over company decision-making.
Calls are building for greater oversight of the power being wielded by Australia’s proxy advisory industry, in line with external regulation enacted or proposed in jurisdictions including Britain, the US, Canada and the European Union. Clearly, proxy advisers have a role to play in our corporate landscape but it’s time they were scrutinised by regulators, just like every other provider in the financial services industry.
Regulation would help address issues of competence and conflicts of interest. And more explicit voting guidelines, similar to those in the United States, would discourage investors from abrogating their responsibility by simply ticking the box provided to them by proxy advisers with their own opaque agendas.
Free of any regulation or mitigating guidelines, proxy advisers are influencing shareholder voting, with scant regard for a company’s particular circumstances. They are incentivising shareholder activists to leverage off the two strikes rule and remuneration reports at a level that’s disproportionate to their shareholding and that has nothing to do with remuneration.
The impact of proxy advisers is too often demonstrably not in the interests of companies or the Australian economy. A case in point is how these advisers continue to rail against boards that have directors who are substantial shareholders, ignoring the reality that directors with nothing other than reputation riding on the success of a company are less likely to challenge out-dated business models, take necessary risks and innovate.
The current context, which reflects a shift from director-centric governance to shareholder-centric governance creates a weighty challenge for these directors. How do they resist the temptation to spend all their time and resources focussed on preparing for and responding to activists and proxy advisers instead of the broader, long-term strategic direction of company?
“Calls are building for greater oversight of the power being wielded by Australia’s proxy advisory industry, in line with external regulation enacted or proposed in jurisdictions including Britain, the US, Canada and the European Union”
Which brings me to another aspect of Australia’s corporate jigsaw that creates an environment ripe for activist intervention… the ‘NEDs (non-executive directors) club’. The latest data from the Australian Institute of Company Directors boasts that ‘only’ four directors held four board seats in ASX 200 companies in 2016, only two held five board seats. Across all ASX 200 companies, 182 people held 418 seats – or just more than a third of non-executive directorships. And this data doesn’t reflect the traffic of directors who flow from one board to another.
Reputation means everything when these directorships are the main source of people’s incomes, particularly as they move into retirement from more strenuous executive roles. A NED of an ASX 200 company, who typically attends a dozen or so meetings a year, takes home an average of $170,000 a year in cash (plus superannuation), regardless of the company’s performance. An independent director’s reputation is key to his or her ability to obtain the next board appointment. This delivers a powerful tool to the activist. A director with reputational risk is far more likely to engage and submit to an activist’s demands than a director who represents the interests of a major shareholder.
Australian research undertaken by Professor Peter Swan at the University of New South Wales suggests that the trend towards independent directors in Australia over the past 15 years has destroyed at least $20billion of shareholder value. It’s no coincidence that over the same period proxy advisers have become de facto decision-makers for many institutional investors.
If we take the role of regulation and the consequences of insufficient regulation as a given, what are the core lessons Australian boards should have learned about activism to date? Let me draw on three recent examples to offer three topline responses – and none of it is rocket science
1. Know and engage with your shareholder: BHP
A responsible board needs a plan for dealing with the inevitable activist shareholders that will target an underperforming company and BHP, once known as ‘The Big Australian’, was caught out. After a torrid 10 years, even by comparison with its also-suffering peers in the resources sector, BHP dealt with two separate but related campaigns.
The first was driven by high-profile US activist investor Elliott Management, whose campaigns have a long track record of unlocking latent shareholder value. Elliott’s laundry list of demands included abandoning BHP’s costly dual-listing structure, ditching its failed US shale experiment and increasing returns to shareholders. In a victory of sorts for Elliott, BHP has since announced a plan to dispose of its US shale activities and pledged to adopt more rigorous capital management.
The second campaign involved a number of high-profile shareholders who took aim at incoming director Grant King, former CEO of Origin Energy and the current president of the Business Council of Australia, the country’s peak industry body representing big business. King’s appointment to the board of BHP was announced by outgoing chairman Jac Nasser in February this year, just one day after projects initiated at Origin on his watch were written down by $1.9billion – in addition to a $1.2billion write-down made six months earlier.
With significant shareholder concern around BHP’s poor historical capital allocation decisions (including in respect of US shale), the timing of Grant King’s appointment rankled with fund managers, proxy firms and shareholders alike. Ultimately, King succumbed to the pressure and withdrew his nomination for re-election at this year’s AGM.
As a result of the two campaigns and with BHP finally stepping up its public relations efforts, chairman-elect Ken MacKenzie has reportedly taken more than 100 meetings with investors.
2. Consider the activist’s track record: Ardent
An activist shareholder with an impeccable track record and a strong and detailed plan for the future of a company is difficult to thwart. A little closer to home than the BHP example, we acted for Dr Gary Weiss’s Ariadne in its campaign against Dreamworld owner Ardent Leisure.
Weiss, a close business associate of retail magnate Solomon Lew and well-respected in the Australian business community, had seen enough of Ardent Leisure’s underperformance over the last three years and engaged in a public campaign to appoint four directors to the board. Typically, an activist shareholder would require the company itself to call and hold a general meeting at the company’s cost to have the activist’s preferred directors appointed. The company would draft and distribute the notice of meeting, which would set out at length the incumbent board’s position in relation to the activist proposal.
The activist’s statutory 1,000-word statement would be relegated to the final paragraphs of a 20-page document. In this case, however, Ariadne called Ardent’s general meeting itself. This gave Ariadne complete control over the notice of meeting and, crucially, the messaging.
“For shareholders, directors, commentators and lawyers, increased activism has us all speculating on what’s coming next? Currently, all eyes are on the response of superannuation funds and hedge funds”
Ariadne was ready with a detailed, complex and considered turnaround strategy for Ardent and, in the notice of meeting, directed all proxies be sent to a share registry it had engaged. This meant that Ariadne had visibility over the proxies it had collected, while Ardent remained in the dark until 48 hours before the general meeting. Despite proxy advisors recommending a vote against the activist directors, by the time Ariadne shared the proxies showing strong institutional support with the incumbent board, the current directors knew they had been defeated. As a last-minute compromise, Ardent agreed to appoint Gary Weiss and Brad Richmond to its board and the general meeting was called off.
The final triumph in a campaign described by Australian Financial Review as the ‘biggest win by activist investors in decades’, Weiss was this month (October) appointed chairman of Ardent.
3. Don’t try to pull a shifty on shareholders: Praemium
We also acted for Praemium’s sacked CEO Michael Ohanessian in his successful spill of the entire Praemium board.
Ohanessian had overseen five years of strong growth and shareholder returns, when eight days after announcing record half-year results, he was abruptly fired by the Praemium board. Major shareholders had not been informed and the lack of transparency irreparably damaged the board’s reputation and relationship with those shareholders.
Three major shareholders (Australian Ethical, Paradice and the Abercrombie Group) were so incensed by the board’s actions that they joined Ohanessian to form a shareholder bloc to spill the incumbent board.
The shareholder bloc sought to replace the board with three new, highly qualified and independent directors. Despite irresponsible proxy advisers recommending against the shareholder bloc without attempting to engage with it, and the incumbent board airing a lengthy, damaging and one-sided account of the CEO’s sacking in its notice of general meeting, the shareholder bloc’s resolutions were passed and Michael Ohanessian reinstated as CEO.
Where to next?
For shareholders, directors, commentators and lawyers, increased activism has us all speculating on what’s coming next? Currently, all eyes are on the response of superannuation funds and hedge funds.
While superfunds/institutional investors are unlikely to become activists themselves in the classic sense, they recognise that in order to create value for their investors, they may need to pick sides in activist campaigns and/or seek out activists to drive campaigns they will support.
Australian Ethical is a conservative institutional investor that wouldn’t normally engage in activist activities. The fund was so aggrieved that shareholders weren’t consulted before Praemium’s high-performing CEO was sacked, it felt obligated to resort to activism to protect its clients’ investment. Hedge funds are a perfect match for activists and, having seen multiple hedge funds obtain control of Australian listed companies via debt to equity swaps in the distressed debt space, more of them will engage in classic activism to obtain controlling stakes or board seats.
The jury is still out as to whether activism is helping or harming companies and the Australian economy and, most likely, the reality is a bit of both. Detractors say activists reinforce short-termism and excessive attention on financial metrics rather than long-term growth and strategy.
Supporters believe activists are necessary to shake up underperforming companies
and overly cosy boards. Whatever the case, activism has well and truly arrived Down Under and it’s contributing to a far more complex, unpredictable corporate landscape.
About the Author:
Jeremy Leibler’s commercial and corporate law practice has a particular focus on mergers and acquisitions, public and private capital raisings, takeovers and takeover defences, and shareholder activism and board disputes. He has an intimate knowledge of the law and market practices relevant to listed companies in Australia, and is regularly quoted in the media on issues related to shareholder activism and proxy advisers. Jeremy was recently appointed as a non-executive director of ASX listed Thorney Technologies Limited and is also a member of the Australian Takeovers Panel.