Shareholder Activists in the Boardroom

Australia is becoming fertile territory for shareholder activists — and directors can learn through the process, reports Keith Barrett.

Australian listed company boards are likely to experience more shareholder activism, and the superannuation system and passive investors could play an important role in determining outcomes according to New York-based hedge fund manager Jeff Gramm.

Shareholder activists agitate for change at boardroom level and traditionally try to force companies to release excess cash to generate higher short-term returns. Gramm, author of Dear Chairman: Boardroom Battles and the Rise of Shareholder Activism (HarperCollins 2016), says Elliott Management’s activism against BHP in 2016–17 could be Australia’s “General Motors moment”.

Changing attitudes

“In the 1960s, ’70s and ’80s, you had very few interventions and it was generally frowned upon to support activists,” Gramm says. “Ross Perot’s activism against GM in 1985 was a turning point.”

Following Elliott Management’s campaign for change to the miner’s structure and petroleum division, new chair Ken McKenzie met more than 100 shareholders to hear their concerns. Activists scored a partial victory with the news that BHP would seek to exit its US oil and gas shale operations as they were “non-core” to its business.

In October, James Murdoch narrowly (the vote went 51.6 per cent in his favour) survived an activist protest in the UK over his re-election as chair of broadcaster Sky. Proxy advisers campaigned against his election, protesting over excessive pay and the lack of an independent chair (Murdoch is also CEO of 21st Century Fox, which is trying to buy Sky).

The growing power of proxy voting and rising concerns around the need for regulation were raised as issues of concerns during the AICD Essential Director update series in late 2017.

“Proxy advisors have actually really raised their game, at least in the US,” Gramm says. “Companies used to essentially outsource their decisions to proxy advisors, but they are doing much better work today.”

He notes that this task is easier when the company is large — but smaller companies are still voting according to “a checkbox on a spreadsheet”.

In Australia, there is a trend for superannuation funds to bring their investment teams “in-house”. At the same time, investment revenue is increasingly moving to passive investors like Vanguard and BlackRock through index allocations. Both scenarios create more direct lines of communication between the long-term investor and the companies in which they invest.

“For big institutional investors like Vanguard and BlackRock, their incentive is for the markets to have integrity. They’re going to get more engaged with governance. Issues like sustainability and diversity in the boardroom are things they’re going to act on.”

Activism has a purpose

Gramm argues that activism has a real purpose and that boards can and should use them as an opportunity to become aware of potential issues that were not already on their radar.

“Years ago, the response to shareholder activism was to circle the wagons and prepare for battle. Today, activism is so pervasive that every corporate director is aware of activism and engages with shareholders. Directors should view it as pre-emptive, and appreciate hearing about perceived weak spots.”