London: The occasional activist has stirred up a revolt at an annual general meeting, led a no-confidence vote against management and even taken executives to court. Those are the extreme cases.
But shareholder activism now seems to be turning more mainstream. These more active, no-frills activists are changing the dynamics at the top, their measured, but pointed agitation pitting previously passive shareholders—used to voting with their feet by selling their shares—against senior management. In many cases, the shareholders are gaining the upper hand, boosting or nudging up share prices and sometimes forcing out an executive or forcing the sale of the company.
Most recently, The Children’s Investment fund turned dissatisfaction into deal-making at ABN Amro Bank N.V., leading to rival bids for the bank, the largest in the Netherlands. Peter Paul de Vries, the feisty head of the Dutch shareholder association VEB, successfully took ABN Amro’s management to court for bypassing shareholders when selling one of the bank’s most attractive assets.
“What we have seen so far may only be the beginning,” said Antonio Borges, chairman of the European Corporate Governance Institute (ECGI) and a vice chairman at Goldman Sachs in London. “There are many more opportunities as there are many more underperforming companies.”
Prudential, one of Britain’s largest insurers, on 17 May faced calls from Hermes, a London-based hedge fund, and other shareholders to break itself up. Deutsche Borse, the operator of the Frankfurt stock exchange, earlier this month removed a motion to issue new shares from the agenda of its annual shareholder meeting—mainly to appease New York-based hedge fund, Atticus Capital.
Defensive: In an emotional outburst, ABN Amro Bank chief executive officer Rijkman Groenink complained to a Dutch court on 28 April that his company had become ‘a toy for hedge funds’.
Even Citigroup, the world’s largest financial services company, may not be immune to shareholder revolt. Its shares jumped 4% on 16 May after Edward Lampert, the hedge fund manager who controls Sears Holdings, disclosed a 0.3% stake in the bank and set off speculation he might want to rally support from other investors to influence strategy.
A number of recent cases have shown that shareholder activism can pay: the Hermes UK Focus Fund, which has taken an activist tack, had annual returns of 4.9 percentage points above the FTSE All-Share Index between 1998 and 2004, according to a 2006 study by the London Business School and ECGI.
Yet, activism does not come cheap. The Children’s Investment fund hired its own press relations expert to send out almost daily news updates to journalists about its ABN Amro campaign. Knight Vinke Asset Management, the Monaco-based activist investor, last year took out advertisements in French and British newspapers to campaign for a break up of Suez, the French utility.
Small shareholder associations, whose membership fees do not suffice to finance such large campaigns, are happy to jump on the bandwagon, said Jean-Pierre Paelinck, secretary general of Euroshareholders in Brussels. The efforts seem to be convincing executives that they need to listen to shareholders or risk their jobs or control over their company.
Werner G. Seifert, who was ousted as chief executive of Deutsche Borse after an activist investor campaign, last year disclosed his frustration in a memoir called the Invasion of the Locusts.
Calls from executives who haven’t yet had contact with activist investors, seeking advice on what to do in case an activist hedge fund buys into the company are on the rise, said Philip Keevil, senior partner at Compass Advisers, a merger advisory firm in London. Shareholder activism does not need to be confrontational, he said. Sometimes, managers welcome active shareholders because it gives them an opportunity to push for changes.
But senior executives are also being pressured to deliver shareholder returns as the investment base of companies shift from passive institutional investors with longer-term horizons to more short-term focused hedge funds, sometimes with as little as a 1% holding in a company.
Activism was further fuelled by a realization among shareholders that selling shares, often at a loss, to protest unsuccessful management, did not change anything. It simply meant that the investment was now weighing on someone else’s portfolio and the company continued to underperform.
“Activist shareholders are giving more confidence to those who felt in the past that they had no say and remind managers of their duties to account for shareholders’ interest,” said David Brooks, head of mergers at the advisory firm Grant Thornton in London.
The recent explosion of private equity wealth and the rising appetite for takeovers is adding to the pressure on management to listen to shareholders. Analysts say shareholder activism is also focusing on a growing distrust in senior management that can be traced back to corporate scandals, such as Enron and Parmalat.
Encouraged by the success of activist investors, traditional asset management firms, such as Fidelity Investments, the largest mutual fund company in the world, and Templeton, which never made public statements about their investments in the past, also became more vocal and in some instances publicly threw their weight behind an activist hedge fund.
Henderson Global Investors, a 73-year-old British asset management firm, is planning later this year to set up an “active engagement fund” to look for undervalued companies, buy a stake in them and work together with the management to improve the company’s performance and enhance shareholder value.
Even though shareholder activism is generally considered to be positive because it makes companies more efficient and increases shareholder returns, some analysts said that the focus on short-term returns meant important long-term goals were neglected.
Under pressure to perform, managers may feel forced to come up with short-term fixes for problems that would otherwise require more time to solve, said Brooks of Grant Thornton.
But Borges at ECGI said these would remain exceptions because it was in the interest of short-term investors to sell their shares at a profit and they could do so only if they found new investors who believed in the long-term potential of the revamped company.
Despite the possible high returns, shareholder activism remains hard work. Just how hard is illustrated by the retirement plans of de Vries, who after 18 years of fighting for shareholders’ rights, decided to leave the Dutch shareholder group in October.
Until then, he said, he will fight on and wonder who will be around longer: he or chief executive of ABN Amro, Rijkman Groenink.