Blurring the Lines

Few would disagree that 2016 has been a year of pivotal events. Amongst them, Brexit and the outcome of the U.S. elections surely come top of the list for most. Both occurrences have set in motion a new political and economic dynamics that have impacted the post financial-crisis market framework, changing corporations and investors’ attitudes and outlooks over the short amount of time since they came to be.

As it would be expected, shareholder activism trends have not been impervious to this new dynamic.

In the months since the UK’s vote to leave the European Union, interest from overseas activists in British companies has grown. According to a report by Activist Insight, between June and September this year there was a 27 percent increase in the number of foreign investors eyeing British Plc’s as potential targets – not just in the immediate aftermath of the decision to leave, but also bearing in mind a mid to long-term, post-Brexit UK reality. Opportunities loom and their appeal is unequivocal.

In a recent column for The Times, Richard Page from law firm Mayer Brown, stated that besides an increased foreign interest from activist investors in UK companies, what we are also witnessing is a shift in pace and focus in regards to approaches, which herald a new take on activism initiatives.

Gone seem to be the days when disputing executive pay practices and board’s investment strategies was the sole focus of activist shareholders’ initiatives. Instead, we are seeing a broadening of scope that more often than not also includes a push for a social agenda and an emphasis on changing corporate governance practices.

Such encompassing approaches have their origins in the U.S. where practices have traditionally been much more adversarial in terms of shareholders’ involvement – American activists tend to be more public in voicing how they believe companies should be run and corporate strategies laid down.

By contrast in Europe and the UK in particular, investors’ say on how companies are run has always been a much more engagement-led process, actioned only after years of following a company’s board decisions and only after activist shareholders have had a chance to get to know the business’ board members during AGMs and results days.

But the differences between both styles might be fading. Despite Joseph Oughourlian, Founder of Amber Capital, saying at a Bloomberg event last month that the likelihood of a U.S.-style of shareholder activism approach working in Europe is remote, the fact remains that there are indicators pointing that the differences between U.S. and UK are breaking down.

This is even more so the case, now that the UK is to leave the European Union. As Richard Page puts it “with UK companies now more exposed to non-UK activist shareholder focus, particularly 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” we are bound to see some interesting changes over the next few months, as the wider macro landscape dictates a framework readjustment in both sides of the Atlantic that might bring a low a whole new concept of what shareholder activism is likely to be going forward.

Who’s on board for more Women on Boards: The Activist’s View

It could take four decades for the representation of women on U.S. boards to be the same as men according to an estimate from the U.S. Government Accountability Office. While the gender gap has been one of the long-standing issues facing the corporate world, it is arguably even more prominently seen in the activist boardroom.

According to a recent article by Bloomberg News, the last five years have seen the five largest US activist funds seek 174 board positions and successfully land 108 of those. However, of these 108 seats, women were nominated just seven times. When comparing the same five year period to the S&P 500, 26% of the director openings were filled by women.

A look inside the largest activist boardrooms

Firm Total Nominations Sought # of Women Nominated
Icahn Associates Holding 42 0
ValueAct 15 1
Elliot Management 30 3
Third Point 12 0
Pershing Square Capital Management 23 3

Source: Bloomberg News

Perhaps some of this can be attributed to the general discord within the investment community about whether gender diversity trumps experience and track record when appointing company directors. During this year’s European Corporate Governance Conference hosted by The Deal, Amber Capital CEO Joseph Oughourlian argued that women directors can “create an entirely new environment” by asking challenging questions. But Ken Lever, a seasoned executive with three directorship positions, countered that just asking questions isn’t enough and that diversity works best when directors also help find the answers.

A 2014 article in Fortune Magazine titled “Activist investors’ unintentional war on women” argued that activist investors putting pressure on corporates to recruit board members with industry-specific experience automatically disqualified many otherwise strong women candidates from the selection pool.  However, Ken Squire, Founder of the 13D Activist Fund was quoted as saying “Activists care about one thing – finding undervalued companies and then putting in people they think can create the best value for them and other shareholders. Whether it is women or men, they aren’t nominating slouches.”

While few can argue with the advantages of a meritocratic system in which activists focus on doing what’s best for shareholders and extracting the hidden value in overlooked or mismanaged companies, rather than sticking to quotas and worrying about board diversity, execution of this task can often take bizarre forms.

For example, earlier this year, activist investor Keith Meister of Corvex Management, who famously said that he would only like to seat “A-team” level board members, appointed an all-male board to Williams, a $20bn energy Pipeline Company in which Corvex invested. However, gender was not the only thing these board members had in common; they were all also employees of Corvex. Meister conceded that these board members were only temporary and that he would ask them all to resign at the next AGM by which time he had identified suitable energy and management experts to take their place. However, Meister’s “straw men” are one of many creative manoeuvres activists are taking in order to ensure board seats get filled in the way that is most advantageous to them.

In response to the prevalence of activists nominating friends and colleagues (who more often than not, are male and white), women like Diane McKeever have started a new trend.  McKeever, described by the New York Times as “charging through the notoriously male-dominated world of activist investors”, together with Robert Longnecker started Ides Capital, the first US activist hedge fund fronted by a woman.  On the other side of the pond, Catherine Berjal and partner Anne-Sophie d’Andlau bucked the trend even earlier in 2010, when they launched CIAM, a fund focused on event driven, merger arbitrage and activism in Europe. Both Ides and CIAM have been successful in instigating boardroom change and garnering strong results for shareholders.

While achieving a tangible demographic shift in the activist boardroom will require considerable effort from everyone in industry, some think it may just be down to one simple recipe: time. In an interview with Bloomberg TV, Carla Harris, vice chairman of global wealth management at Morgan Stanley, said more women will make their way to boardrooms as younger generations rise in the workplace.  Harris said, “The more data that comes out that talks about the outperformance of diverse boards, the more you’ll see change.” The second generation of activist investors will have a historic opportunity to make strides in the diversity campaign, and perhaps even prompt the founders of the industry to launch this movement early.

UK Activism – Toscafund

Activism in the UK market is never easy. For all the sabre-rattling by UK institutions over the past few years, they are rarely inclined to attack incumbent boards and management in the open, through a proxy battle or a general meeting. Occasionally they vote against a CEO’s remuneration, but given that these votes tend to be advisory rather than statutory, they act more as a protest rather than any demand for real change.

More often UK shareholders like to work behind the scenes, putting pressure on CEOs through their brokers or in private meetings. In most cases this process works well and avoids the media glare and expense of a full proxy battle. But in some cases, when a chairman or CEO turns a tin ear towards the concerns of his company’s owners, a proxy battle is the last resort.

Over the summer Maitland acted as communications adviser to Toscafund, the $4 billion asset management group, following its decision to call a Shareholders’ Meeting at Speedy Hire plc, the plant hire group, to remove its chairman and appoint an additional independent non-executive director onto the Board.

This was the first time in its 16 history that Toscafund had ever voted against any of its investee company Boards. It did not take this decision lightly but out of exasperation at the poor governance at Speedy Hire and the fact that its concerns were simply not being listened to by the Board or its chairman, Jan Astrand.

The process was extremely instructive on a number of fronts:

  • Firstly it became clear there was a large degree of inertia amongst the other shareholders. While they sympathised with Toscafund’s concerns, many felt that voting out a chairman was too drastic, despite the company’s many failings.
  • Second we realised early on that governance was always more of an issue for shareholders than performance. Speedy Hire’s share price has halved since the start of last year but this alone was not enough for investors to want change. The Board’s governance failings by contrast, were a real cause for concern.
  • Third, the governance groups, such as ISS and Glass Lewis, were extremely influential to the overall vote. Ultimately each recommended a vote against the removal of the chairman but for the election of Mr Shearer, and this was the eventual result by a significant margin.
  • Fourth, the (significant) media coverage of the episode was important in setting the tone for the debate, and putting pressure on Speedy Hire to make concessions (such as the Chairman’s reluctant agreement to step down from being an executive into a non-executive role) but the main event were the private meetings with shareholders.
  • Fifth, it was nevertheless difficult to keep track of voting patterns until the vote was finally announced after the meeting. Most institutions did not want to disclose how they voted given the intensity of the debate.

So Toscafund succeeded in its main goal and David Shearer was appointed as an independent non-executive director to the Board, despite strenuous opposition from Mr Astrand and his colleagues. But the vote to remove Astrand was defeated, partly because he committed to step down from being executive chairman to a non-executive role.

Ultimately Toscafund had to expend a great deal of time, trouble and effort to effect sensible change in a company with significant issues. Toscafund is Speedy Hire’s largest shareholder by far and, in any logical world, the company should have listened to, and responded to, its concerns at a much earlier stage.

At least the episode shows that courageous investors can use a general meeting as an instrument of last resort, when more diplomatic tactics have failed. This threat should in turn help to ensure that companies listen to their owners, rather than face the potential consequences.

Less is more – Activists go small-cap

Recent media reports on investor dissatisfaction over activist and hedge fund performance have largely centred on the apparent disparity between high management fees and the returns achieved. While many are happy to pay more for better returns, the recent returns we have been seeing have often been less than stellar and sometimes downright atrocious. However, given the state of global markets at the moment and a general fear of us perhaps being in a “lower-for-longer” interest rate environment, the alternatives for finding return are not immediately apparent either.

So, in facing such a landscape and continued pressure from their investors, activists have been increasingly turning away from the higher, mega-cap end of the market where in recent years campaigns have focused and started to look for investment opportunities at the smaller market cap end in hopes of a more favourable return profile.

While the challenges of this approach are obvious – smaller companies have less liquidity, and are often “untouchable” for institutional investors – the opportunities that go along with that can be quite tempting. The archetypal stockpicker, the talented spotter of any market mispricing, is all the more in his element in the smaller cap space, where limited resources mean companies may often be inefficiently run or corporate governance largely ignored. Similarly, due to the seismic changes we are witnessing on the sell-side, many of these smaller companies are ending up as City or Wall Street “orphans”, with no institutional coverage on them at all, thus making the informational gap even larger.

As we wrote at the start of the year, this trend is already starting to be evident in industry statistics. Activistmonitor, Mergermarket’s shareholder activist platform found that in the first half of 2016, so called “super campaigns”, that is, campaigns involving companies with market caps of over $10bn, decreased from 16 to 6 from 2015. Similar trends have been identified by the UK-based Activist Insight, who found that more money has been allocated to campaigns at micro-caps this year than last year. Size group definitions do vary a lot of course, but generally companies under a $250-$300million market cap would fall into this group.

Despite the clear opportunity in this part of the market, this is no free lunch. As it is such an underserved segment, there is significantly less information available and any investor looking to start a successful campaign will need to put in significantly more hours researching before launching a campaign than he would perhaps do at the other end of the market. Having done so however, he will likely meet a much less crowded marketplace and the likelihood that he is met with a competing activist on a similar path will be vastly smaller.

Obviously this doesn’t negate the need for concentrated effort and a clear plan to effect change at the target company, but it does mean that at the start line, you are perhaps slightly more advantaged than you would otherwise be and having your voice heard will be easier to achieve. Less shouting, more action.

Chandos Communications wins TMT 2016 Media Awards

Chandos Communications has been named Best Strategic and Financial PR Agency – London by the 2016 TMT News Media Awards.

Having launched just over a year ago, Chandos Communications is very proud to be selected for this prestigious award by TMT News.

The 2016 Media Awards recognise the exemplary work done by individuals and businesses across the expansive and ever-evolving TMT industry.

The award reflects the depth and breadth of Chandos’ recognised skills and ability to support its clients in the TMT sector.

The full list of winners and TMT News’ awards supplement can be found here.

Nintendo’s Struggle to Catch ‘Em All

It has been almost impossible to escape Pokemon Go frenzy in the recent weeks. According to the research firm SimilarWeb, it has already surpassed the dating app Tinder in popularity, has nearly as many daily users as Twitter, and has topped the App store list since its launch in the US on July 7. Since its launch in the UK after EU and US, it has disrupted our world and has been discussed in all sorts of contexts – including shareholder activism.

Pokemon Go is a phenomenal success story. For those who are not familiar with its particularities, Pokemon Go is an augmented reality mobile phone game that relies just like the popular dating app Tinder on location based services. Pokemon Go currently has made millions of people across the world go on the hunt for virtual cartoon characters around their homes, neighbourhoods and vacation spots. It is particularly popular among 18-35 year olds – among the millennial generation, capitalizing on nostalgia, and younger consumers who, although they didn’t experience the Pokemon hype in the 90’s are still fascinated with Pokemon Go’s advanced tech and augmented reality aspects. Furthermore, many argue that it is actually good for the players’ health since they have to exercise on the hunt to ‘catch ‘em all’.

What most people do not know is that all this was initiated through the continued persistence of an activist investor. For years, Nintendo had refused to create mobile games for download. Three years ago, Hong Kong-based shareholder activist Oasis launched a campaign to persuade Nintendo to allow its iconic intellectual property – such as the Pokémon characters – to be used in mobile gaming. Oasis’ very public persistence attracted the attention of analysts and investors. However, Nintendo stayed stubborn. It considered smartphone games a short-term fad that would cannibalize value on its console-based games in the long run.

In the three years prior to 2014, Nintendo’s share price had fallen nearly 50%. However, management still refused going mobile and tried to appease concerned shareholders with promises that focusing on fitness games could save the company. Unfortunately, this did not work as planned. In April, the company announced a 61% drop in annual net profit. Meanwhile, Oasis continued with its very public efforts in pushing the company towards mobile with presentations, private letters and meetings with management. Additionally, Japanese Prime Minister Shinzo Abe’s corporate-governance reforms started to push companies to be more receptive to shareholder activism.

In 2015, Nintendo eventually bulged; it announced it would invest in mobile firms and license its intellectual property. Pokémon Go, in which Nintendo is invested, and the global mania it is responsible for, is a result. Nintendo shares soared after the release of the game.

The story shows two things. First, activism in Asia, which until recently was considered to be in its infancy compared with other regions, is growing rapidly. Other examples include Elliot Management against the Bank of East Asia. Second, Pokemon Go has once again illustrated how a passionate activist can point a struggling company towards a rescuing direction.