The Activist Powerplay in Europe

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Georgeson1Cas Sydorowitz – CEO at Georgeson Corporate Advisory, London office

 

 

 

 

 

As an American living in Britain, I am routinely told that the differences between rugby and football say something profound about the nations that play each sport.

As a patriot, I’m not sure I can agree that the absence of helmets and padding in rugby reflects a greater hardiness among the game’s participants. Nor do I believe that our passionate support of a game so unpopular beyond our national borders implies some sort of deep-seated cultural arrogance among us Yanks. But when my British colleagues express a sense of disbelief in the amount of money involved in American football, I’m willing to concede that we may have found a distinction worth contemplating.

In American football, the market has taken over and made the sport a means to a capitalist end. It’s not just about sporting prowess, but the theatre of the event and the side shows giving it outright market appeal. This in turn attracts a national audience and permits the sport to gain massive endorsements from sporting goods makers and TV rights. An hour of playing time can take three hours of viewing time, providing plenty of opportunities for ‘messages from our sponsors’ and the most notorious element of the Super Bowl globally is not the result, but the most talked about advert.

Nevertheless, even during my time in the UK, rugby has changed. Watching a match now – with the TV money, the inflated salaries, the investment in player development and physique and the ‘final-game-decides-all’ format – means that while remaining a thoroughly unique sport, aspects of rugby now have more in common with its US equivalent. Just as we Americans are happy to supplement our own customs with those borrowed from Europe, so the modern face of rugby seems to show that Europeans are more than capable of reversing this arrangement when it suits them.

Evolving techniques

Although the stereotype of a shareholder activist also remains a uniquely North American character, increasingly it is European, locally based activists that are now making the headlines. Shareholder activism is certainly not new to this continent, but recent years have seen an influx of techniques that have typically previously been associated with American groups. Most strikingly, once they have established their targets and set a goal, activists are including stages in their campaigns in which they make themselves and their campaign as conspicuous as possible. This includes employing PR agencies, issuing white papers, creating microsites and working with journalists in order to ramp up pressure on management from every angle through the resulting media intensity. They also habitually hire proxy solicitation services to ensure they have the most detailed and up-to-date view of the best approach to the shareholders and proxy advisors to exert pressure on the company that’s within their crosshairs.

Companies undermine their own defences by failing to realise that activists are most often extremely smart investors looking for change that will unlock value. Their research can be categorised as private equity style analysis where they may invest one to two man years of research into a case before they ever go public.

Once they have developed their investment thesis, quantified what they think the change should be and how they might achieve it, they will execute a plan with military precision and determination. Most importantly, they ensure they are continuously and exhaustively briefed on the companies they are targeting. However radical or extreme their suggestions and tactics can seem, they are usually based on detailed, in-depth analysis and never on mere knee-jerk reactions. That is why, when targets attempt to dismiss activists as amateurish or not understanding the company, they may be rejecting well-reasoned alternatives. Some companies look at the research as free consulting services. In many instances, thanks to their research, the activists are more knowledgeable than the directors who are trying to hold onto their seats on the board.

 

“Companies undermine their own defences by failing to realise that activists are most often extremely smart investors looking for change that will unlock value”

 

The use of US-style, bombastically visible tactics by shareholder activists is causing ‘long investors’ to fundamentally rethink their own approach. While such European shareholders typically prefer to conduct gentlemanly engagement between themselves and management behind closed doors, the involvement of activists has ensured that most proxy fights in Europe now provoke a comment in the media from other shareholders (whether in support of or opposition to the activists). When Pfizer made its bid for the British firm AstraZeneca in 2014, for example, 12 of the top 20 AstraZeneca shareholders voiced their opinion on the deal publicly.

Cultural shift

Nevertheless, European culture has not changed to the extent that media intensive campaigns alone can win results for activists. In the UK, for example, many long investors are inclined to give management the benefit of the doubt and allow them a year to address the activist concerns, even if the financial underperformance has gone unchecked for years. As a result, it requires a cultural shift by many US activists if they wish to run campaigns in Europe. Whether an activist is successful or the company can resist will be determined by how effectively both sides can engage with shareholders; and the best methods of engagement are still different in Europe to elsewhere.

Many investors are becoming far more publicly vocal, actively seeking opportunities to engage more often on a wider array of issues. Between the categories of traditional, more passive shareholding on one side and aggressive, disruptive activist shareholding on the other, active shareholders are growing strongly in both number and influence. An excellent example can be seen in the ‘Aiming for A’ investor coalition that achieved 98 per cent and 99 per cent support on their proposal Strategic Resilience for 2035 and Beyond at BP’s and Shell’s meetings on 16 April and 19 May respectively. Their campaign was unique in that it won the support from the BP board in addition to investors globally. It ably demonstrated that through open dialogue, long-term investors, often working on behalf of beneficiaries who are looking for a return many years hence, can accomplished real change.

Across Europe, investors are collaborating more often to protect their rights, particularly by writing to issuers in support of direct engagement: encouraging a focus on long-term value creation and less on short-term gains through share buy backs or increased dividends. In addition, when activists begin campaigns, the increased attentiveness and responsiveness of long investors means they are far more likely to attract support among existing shareholders.

These changes are in turn revolutionising how companies themselves deal with investors. There has been a fundamental and ongoing shift in terms of accountability towards shareholders within companies across Europe. Even if there isn’t an activist shareholder on the register, long investors expect more direct engagement. This change in behaviour is not just in response to particular shareholder activist campaigns or the threat of them, but towards longer, traditional investors, too. Savvier companies are themselves deploying similar tactics used in activist situations for their routine meetings. The last thing you want is for your first ever call to a shareholder to involve you asking them for support because there is an activist trying to oust the company’s board.

Forging connections

Establishing links and building relationships with the key governance contacts at your investors is a practical first step in getting ahead of activists. If a company knows and engages with their shareholders regularly and the investment story and governance structures are well understood and are producing results, activists will have few sympathetic ears. The shrewdest companies know who owns their shares and understand who is or is not voting and how, as well as who influences those shareholders. Their governance policies, which drive their voting behaviour, should also be well understood well in advance as activists look at past voting activity and pick up on resolutions that did not get overwhelming support, or quorums that were unusually low as part of their screens to whether or not they can effect change in a company.

In the UK, the trend towards the greater involvement of investors was encouraged by the introduction of The Stewardship Code by the Financial Reporting Council in 2010. These guidelines seek to encourage better dialogue between issuers and their shareholders for the creation of long-term value. Then, two years later, the UK’s 2012 so-called Shareholder Spring took place, with events sending shockwaves through the corporate world and beyond. A series of clashes between investors and management saw the bosses of AstraZeneca, Trinity Mirror and Aviva all leave their positions, having received significant votes against their remuneration reports. Many others, including the CEO of advertising and public relations multinational WPP, endured serious confrontations on remuneration. Partly in response to these backlashes, UK legislation was changed to address public objection to the misalignment between pay and performance.

Although an advisory vote on pay at a company’s annual accounts meeting was mandated by the 2006 Companies Act, it was the 2013 Enterprise and Regulatory Reform Act that implemented a binding vote on the remuneration policy. The trend across Europe is to follow suit, with other markets either already having or implementing similar requirements on companies. The Shareholder Rights Directive is an EU-wide initiative to mandate all EU markets to implement a similar vote on remuneration.

In his government-commissioned 2012 report, British economist John Kay detailed some fascinating observations. He put forward the view that an absence of shareholder engagement over long-term corporate strategy was damaging companies’ competitive advantage and that unnecessary regulation was obstructing greater shareholder involvement. He also recommended the creation of a body to promote collective engagement by both domestic and international investors within UK companies. Consequently, the Investor Forum was created and the group is now working to “contribute to long-term investment performance by promoting cultural change and enhancing shareholder stewardship”.

Another approach to encouraging responsible stewardship can be seen in the French market where shareholders that have been registered for more than two years are automatically granted double voting rights unless two-thirds of a company’s investors opt-out. Also, Italy recently introduced a law allowing shareholders in the Italian market to also access double voting rights after a period of ownership, as long as there has been affirmative shareholder agreement to introduce the benefit.

While this advantage has been harnessed to significant effect by entrepreneur Vincent Bolloré at Vivendi’s annual meeting in April, who used the double-voting rights to tighten his grip on the group and by the French government, who increased their stake in Renault to 20 per cent in order to prevent the car maker from using the ‘two-thirds’ clause to opt-out of the double-voting scheme; the double-voting rights approach is not popular with all investors due to the risk of disadvantage. The International Corporate Governance Network and several large institutional investors are known to be against this type of scheme as they don’t believe it works for a broad spectrum of investor types, all of whom have different timescales and priorities in terms of growth and who they believe deserve equal treatment.

Activist investment

The level of engagement from long investors has increased considerably over the last five years, with many investors now willing to comment publicly. More people are trying their hand at activism and existing activists are targeting bigger companies – as a result of the prominence of the subject in the US headlines throughout the year. Size is no longer a deterrent for some of the largest activists, who are going after companies such as Microsoft, Apple, Yahoo, Dupont and Bank of New York.

As an asset class, there is increasing demand for pension funds and family offices to allocate some of their portfolio to activist investing. This phenomenon is not just a US one and the number of European activist investors continues to grow as do the assets under management. The companies being targeted by those same activists are some of the largest across Europe.

Activists are not only measured on success of their campaigns, though that is a very important metric. In that statement lies a small secret that can help to deal with an activist investor – think about the situation as if in their shoes. Activists have clients and shareholders whom they have to satisfy, just as a company does. Being able to claim a victory, of any size, allows the activist to go to their clients with a successful track record. This makes their marketing material that much stronger and increases the likelihood of them winning further investor mandates. The opening requests from an activist are often their negotiating position, a set of demands that they know they will not secure, but which allow themselves a lot of room to claim a victory further down the road.

To bring us back to my opening analogy, European sports, such as rugby, are adapting in a fast-changing world without abandoning what makes them unique, including adopting some of the techniques more associated with American sporting culture. Although traditionalists might find some elements abrasive or alien, these changes can help improve participation, increase their sport’s longevity and help ensure they are competitive in a globalised and fast-moving world. So it is too with investments. The landscape is rapidly changing and the smartest companies and investors are adapting as well.

 

 

About The Author:

Cas Sydorowitz has been with Georgeson since 1998, bringing with him five years’ experience in international investor relations and shareholder identification. Cas is responsible for Georgeson’s Northern European Proxy and Corporate Advisory business.

Cas has an expert knowledge of global proxy voting mechanics and key governance matters affecting issuers and shareholders globally. Having worked for several activists and against many more he has in-depth experience to support investors or issuers in complex, sensitive activist campaigns.

Cas, while a New Yorker, has been in London for 12 years. He maintains membership in the ICGN, a global governance-related organisation that set the agenda for the global governance debate between issuers and shareholders. He has participated in various industry organisations including the Shareholder Voting Working Group in the UK and European Industry working committees on Target 2 Securities, Legal Certainty and the Working Group for Market Standards for General Meetings