Share­holder ac­tivism

Keep­ing ex­ec­u­tives on their toes is good for ev­ery­one

Financial Mail - Investors Monthly - - Front Page -

Share­holder ac­tivism is all the rage in the US th­ese days — and in­creas­ingly seen as a panacea for cor­po­rate ail­ments like board­room com­pla­cency, ex­ec­u­tive largesse and lazy bal­ance sheets. Un­for­tu­nately, the odd bouts of share­holder ac­tivism seen on the JSE lately should not be in­ter­preted as an on­set of pro­found and or­ches­trated rat­tling of cor­po­rate cages, at least not in the im­me­di­ate fu­ture.

That’s a pity. Share­holder ac­tivism, though some­times per­ceived as an abra­sive and undiplo­matic tac­tic by mav­er­ick in­vestors, cer­tainly keeps ex­ec­u­tives on their toes. Ac­tivism can add a fresh cor­po­rate per­spec­tive, high­light cor­po­rate gov­er­nance short­com­ings, un­lock trapped value and al­ter the course of strate­gic en­deav­ours for the bet­ter for all share­hold­ers.

Though there’s not much lo­cal share­holder ac­tivism, the few suc­cess­ful tilts that un­fold in the public domain are sweet and sat­is­fy­ing, not to men­tion re­ward­ing.

Older read­ers might re­mem­ber what is prob­a­bly the best ex­am­ple of spon­ta­neous share­holder ac­tivism from the early 1990s when the late, great Issy Goldberg, chair­man of the now de­funct SA Share­hold­ers As­so­ci­a­tion, won a few valu­able cents more in a mi­nor­ity buy­out of­fer for Tafel­berg Fur­nish­ers. A share­hold­ers’ meet­ing was ad­journed so that Goldberg and the di­rec­tors could thrash out a set­tle­ment in what ap­peared to be a store­room off the show­room of Tafel­berg Fur­nish­ers’ Bel­lville branch.

But in truth out­right vic­to­ries for share­holder ac­tivists have been far and few be­tween. Th­ese would in­clude the col­laps­ing of pyra­mid hold­ing com­pa­nies, the dis­man­tling of N-share struc­tures and the spin­ning off of op­er­a­tional as­sets to un­lock value. Sev­eral years ago share­holder ac­tivists at prop­erty com­pany Fair­vest man­aged to re­jig prac­ti­cally the en­tire board — an ef­fort that has re­sulted in a com­plete re­vamp of what looked a stag­nant real es­tate counter.

More con­tem­po­rary ex­am­ples in­clude lone ranger share­holder ac­tivist Chris Lo­gan and the hugely pow­er­ful Coro­na­tion Fund Man­agers scup­per­ing a con­tentious spe­cific share

Ac­tivism, at best, will con­tinue to show up in pock­ets but not build enough mo­men­tum to cre­ate a fully fledged move­ment

In truth out­right vic­to­ries for share­holder ac­tivists have been far and few be­tween

buy-back pro­posal by Dis­tri­bu­tion and Ware­hous­ing Net­work (Dawn) that would have greatly re­warded a se­lect group of em­pow­er­ment share­hold­ers to the po­ten­tial detri­ment of mi­nor­ity share­hold­ers.

Small fi­nan­cial ser­vices player Con­duit Cap­i­tal also ex­pe­ri­enced a shake-up last month that felt, looked and sounded like share­holder ac­tivism when funds aligned to US-based in­vestor Sean Riskowitz over­hauled the board, changed the ex­ec­u­tive func­tions and took up the role of di­rec­tional share­holder. A cor­po­rate makeover is also pending at strug­gling as­set manager Cadiz, where the founders have given way to a man­age­ment con­sor­tium that has now linked up with Stel­lar Cap­i­tal Part­ners — a small in­vest­ment firm an­chored by re­tail ty­coon Christo Wiese.

Con­trast­ing th­ese ac­tivism suc­cesses are the cu­ri­ous events that un­folded at floor­ing busi­ness Ac­cen­tu­ate, where the votes of cer­tain dis­sent­ing share­hold­ers were dis­al­lowed af­ter tech­ni­cal is­sues around nom­i­nee com­pany own­er­ship came into play.

At the time of go­ing to press there was also the heart­en­ing news of bou­tique as­set manager Abax go­ing public with its ac­tivism at industrial ser­vices spe­cial­ist How­den. Writ­ing to Abax clients, fund manager An­thony Sedg­wick out­lined “a ma­jor battle” un­der­taken against the sub­ver­sive be­hav­iour of the How­den board and its ma­jor­ity share­holder, US-based Col­fax (see box on page 23).

In over­all JSE value, th­ese ac­tivism thrusts are mi­nus­cule. Share­holder ac­tivism in the US, on the other hand has gone up a few gears in the past five years, and has seeped into main­stream in­vest­ing. The Econ­o­mist mag­a­zine shows the growth in ac­tivist in­vest­ment funds un­der man­age­ment in the US has gone from around $40bn in 2008 to around $120bn now.

More in­trigu­ingly, the mag­a­zine says that ac­tivist funds at­tract a fifth of all flows into hedge funds, and that in the past five years one com­pany in two in the S&P in­dex has had an ac­tivist fund on its share­holder reg­is­ter. Com­pared with the US, lo­cal share­holder ac­tivism re­mains at best spo­radic with such in­ter­ac­tions un­der­taken mainly by in­di­vid­u­als.

Cur­rently there are no ac­tivist funds — at least that have been for­mally con­sti­tuted for such a pur­pose — op­er­at­ing in SA. There have been at­tempts in the past, in­clud­ing turn­around spe­cial­ist FRM (which was aligned to the old Coro­na­tion Group but un­for­tu­nately got en­tan­gled in the hor­ri­ble LeisureNet mess), but none has en­dured.

The best-known pro­po­nents of share­holder ac­tivism are in­di­vid­u­als like Lo­gan and Theo Botha. Their ef­forts — de­spite of­ten cit­ing valid gov­er­nance con­cerns and rais­ing is­sues of fun­da­men­tal im­por­tance — are of­ten eas­ily de­ferred or even triv­i­alised by com­pa­nies be­cause there is rarely sup­port from in­sti­tu­tional or as­set man­age­ment. At the AGM of an in­vest­ment com­pany last year the chair­man chided Lo­gan for be­ing the only share­holder who per­sis­tently raised a cer­tain is­sue.

Though Lo­gan has en­joyed suc­cess­ful tilts over the years — his stand­out ef­fort be­ing a one-man wreck­ing ball ef­fort in de­mol­ish­ing the Lib­erty Hold­ing pyra­mid in 2008 — he con­cedes ac­tivism is not a full-time busi­ness. “I’d rather chase the oc­ca­sional ac­tivist op­por­tu­nity. It’s far bet­ter to buy a growth stock like Pi­o­neer or Naspers than to have to biff it out with feisty found­ing share­hold­ers or stub­born di­rec­tors.”

RECM & Cal­i­bre CEO Jan van Niek­erk reck­ons the for­mal­i­sa­tion of share­holder ac­tivism in SA is re­stricted by a ra­tio­nal num­bers re­al­ity. “The JSE is a small mar­ket and you can eas­ily burn your bridges. In re­al­ity an ac­tivist fund’s goal might be to clinch one re­ward­ing deal and then re­tire af­ter that. It would be dif­fi­cult to make a ca­reer out of share­holder ac­tivism.”

Van Niek­erk also be­lieves fi­nan­cial in­sti­tu­tions and as­set man­agers won’t go the ac­tivism route. “You need dif­fer­ent skills sets to man­age third-party funds and to shake up a com­pany.”

He pre­dicts ac­tivism, at best, will con­tinue to show up in pock­ets but not build enough mo­men­tum to cre­ate a fully fledged move­ment. “SA is un­likely to em­u­late the US ex­am­ple where spe­cial­ist in­vest­ment en­ti­ties take small stakes in busi­nesses with the hope of mak­ing a dif­fer­ence. Here we tend to see in­vestors tak­ing big­ger po­si­tions to in­flu­ence and ef­fect changes in a com­pany rather than tak­ing a small stake and mak­ing a big noise in de­mand­ing changes.”

Van Niek­erk’s ar­gu­ment is, to an ex­tent, re­in­forced by the in­vest­ment ac­tiv­i­ties of large cor­po­ra­tions like Bid­vest and PSG Group over the past few years.

Bid­vest played a key role in re­shap­ing Co­mair (in­clud­ing a sur­prise board­room shuf­fle) and

is cur­rently chang­ing the pre­scrip­tion at strug­gling phar­ma­ceu­ti­cal gi­ant Ad­cock In­gram. PSG, on the other hand, had a hand in the re­cent shake-up of Pi­o­neer Foods (trig­gered by the ap­point­ment of ex-Tiger Brands ex­ec­u­tive Phil Roux as CEO) and is work­ing to en­hance re­turns on smaller in­vest­ments in un­listed fruit mar­ket­ing gi­ant Capes­pan (now sub­ject to a buy­out of­fer), tech­nol­ogy busi­ness Poynting and ser­vices busi­ness CSG.

Lo­gan con­cedes there is a nat­u­ral re­luc­tance by large in­vest­ment in­sti­tu­tions to get be­hind share­holder ac­tivism. “It’s cul­tur­ally in­grained and we also have a rel­a­tively small in­vest­ment mar­ket. In­sti­tu­tional in­vestors will worry that if they start shak­ing things up, there might be neg­a­tive im­pli­ca­tions.

“When I was in main­stream as­set man­age­ment I would phone other large share­hold­ers to ask for sup­port on an is­sue. They al­ways de­clined, even if there were com­pelling rea­sons to seek such sup­port.”

But Lo­gan does ar­gue that share­hold­ers in SA tend to sit on their hands for too long. He cites as­set man­age­ment firm Cadiz as an ex­am­ple. “We even­tu­ally saw a shake-up at Cadiz when new in­flu­en­tial share­hold­ers emerged. But one has to ask whether this has not hap­pened too late. You don’t want a sit­u­a­tion where some­one is forc­ing change when the fu­ture of a com­pany is in jeop­ardy.”

Lo­gan be­lieves if share­holder ac­tivists are to play a larger role in cor­po­rate SA, then the pro­po­nents need to se­cure wider sup­port from large share­hold­ers. “It’s prob­a­bly best to start by bring­ing a clear and spe­cific propo­si­tion to the ta­ble. Though I think it would take a lot for in­sti­tu­tional share­hold­ers to change their spots.”

Mo­men­tum As­set Man­agers small com­pa­nies ex­pert Shawn Stock­igt, how­ever, main­tains that share­holder ac­tivism has a crit­i­cal role to play.

“One has to ac­cept that small com­pa­nies that have only re­cently made the tran­si­tion from pri­vate or fam­ily-owned sta­tus to a public com­pany with out­side share­hold­ers prob­a­bly won’t make a com­plete tran­si­tion to a listed cor­po­rate im­me­di­ately. Some old habits may linger which don’t sit com­fort­ably with JSE reg­u­la­tions and guide­lines.”

But Stock­igt prefers not to go public with com­pany-spe­cific con­cerns, pre­fer­ring to fol­low a three-step process. “We will al­ways first en­gage with man­age­ment on is­sues that con­cern us. If we don’t make head­way here, then we use our vote to reg­is­ter our sen­ti­ment. If man­age­ment still doesn’t en­gage con­struc­tively in dif­fus­ing out­stand­ing is­sues and we can see we are un­likely to make any progress on the mat­ter, then we vote with our feet.”

He stresses it is rare to exit a com­pany — even though Mo­men­tum re­cently did dis­pose of its stake in Ac­cen­tu­ate when votes were dis­al­lowed at the AGM. “In most cases man­age­ment wants to make it work. But the key thing is to use your proxy.”

Though the exit at Ac­cen­tu­ate was dis­ap­point­ing, Stock­igt points to the re-en­gi­neer­ing of SA French into the highly prof­itable Torre as an ex­am­ple of suc­cess­ful be­hind the doors en­gage­ment. “Here the Van Breda fam­ily — the orig­i­nal con­trol­ling share­hold­ers of SA French — played a crit­i­cal role in aid­ing the trans­for­ma­tion when in­vest­ment banker Charles Pet­tit stepped in to re­shape the com­pany. Ul­ti­mately the Van Bredas are now much bet­ter off than they were be­fore.”

Can­non As­set Man­age­ment’s Adrian Sav­ille points out that rarely has SA’s in­vest­ment cul­ture been ag­gres­sive or hos­tile.

“That, of course, does not mean we are not ac­tive share­hold­ers. At Can­non we con­sider and vote on ev­ery res­o­lu­tion and share­holder is­sue.”

He main­tains that the scope for share­holder ac­tivism on the JSE is limited by the asym­met­ri­cal mar­ket cap­i­tal­i­sa­tion of the lo­cal mar­ket. “On the JSE you have 40 stocks mak­ing up 80% of the col­lec­tive mar­ket value. Share­holder ac­tivists would need to tackle one of the top-40 com­pa­nies to get re­ally meaty re­turns.”

Sav­ille be­lieves share­holder ac­tivism does not have to be ag­gres­sive or con­fronta­tional but can be more ef­fec­tive if wielded in a con­struc­tive or col­lab­o­ra­tive man­ner.

“We have en­gaged suc­cess­fully with a listed com­pany that we thought was am­bigu­ous in cer­tain of its Sens an­nounce­ments, help­ing strengthen the in­vestor re­la­tions func­tion.”

But Sav­ille says Can­non was less suc­cess­ful in en­gag­ing an industrial com­pany about re­leas­ing value from as­sets trapped on its bal­ance sheet. The re­sponse we got from the board was not even de­fen­sive but a de­struc­tive coun­ter­at­tack.”

He says Can­non had two op­tions — up the ante with ag­gres­sive in­ter­ac­tion with ex­ec­u­tives or de­cide whether fur­ther en­gage­ment was worth the has­sle of a pro­tracted and ex­pen­sive legal battle. “We de­cided to sell out, which was a great de­ci­sion be­cause the share price has weak­ened markedly.”

One of the big­gest draw­backs for ac­tivism ini­tia­tives is costs. The con­sor­tium of in­vestors — all for­mer Coro­na­tion Cap­i­tal ex­ec­u­tives — that tan­gled with Ac­cen­tu­ate racked up a R700 000 legal bill in try­ing to up­hold the va­lid­ity of their votes. Such costs are dif­fi­cult to jus­tify in sit­u­a­tions where an ac­tivist in­vest­ment may be worth only R10m to R20m.

The scope for share­holder ac­tivism on the JSE is limited by the asym­met­ri­cal mar­ket cap­i­tal­i­sa­tion of the lo­cal mar­ket

For a determined fig­ure like Theo Botha — ar­guably SA’s best-known share­holder ac­tivist — the cost im­pli­ca­tions are a huge de­ter­rent to on­go­ing ef­forts to chal­lenge com­pa­nies on a va­ri­ety of cor­po­rate gov­er­nance and fun­da­men­tal is­sues.

Botha says many of the con­cerns raised at AGMs are deemed to be soft is­sues com­pared with in­vestors’ fix­a­tion on share price re­turns and div­i­dends.

“But th­ese soft is­sues have a habit of turn­ing into hard is­sues over time, and here I can point to de­vel­op­ments at com­pa­nies like Sage Life, Su­per Group, Sa­sol, Sappi and JD Group, where my ini­tial con­cerns were waved away as nit-pick­ing.”

He is hope­ful, how­ever, that the Code for Re­spon­si­ble In­vest­ing — which re­quires as­set man­agers to dis­close their votes — will lead to a more dy­namic in­ter­ac­tion be­tween in­vestors and ex­ec­u­tives.

Though most mar­ket com­men­ta­tors reckon the for­mal­is­ing of share­holder ac­tivism is near im­pos­si­ble in SA, Botha tells In­vestors Monthly that he has been work­ing on set­ting up an “ac­tivism fund”.

He ad­mits that ini­tial in­ter­est from the fringes of the lo­cal as­set man­age­ment in­dus­try has — so far — not been over­whelm­ing. “Maybe my rep­u­ta­tion is per­ceived as neg­a­tive, but I am still in promis­ing talks with cer­tain play­ers and re­main hope­ful of set­ting up the fund.”

There’s lit­tle doubt a fund spear­headed by the ir­re­press­ible and metic­u­lous Botha might in­trigue re­tail in­vestors. But Botha sees his role as mul­ti­fold and for the greater good of “SA Inc”. “My ac­tivism is about op­er­a­tional per­for­mance and div­i­dends. For in­stance we are vot­ing against An­glo Amer­i­can’s div­i­dend be­cause I can’t see how the com­pany can make a pay­out when prof­its are fall­ing and most com­modi­ties are in a cycli­cal down­swing. But we are also re­lent­less about cor­po­rate gov­er­nance, en­vi­ron­men­tal is­sues and so­cial re­spon­si­bil­ity — and want to be a proxy for all South Africans want­ing to in­vest re­spon­si­bly.”

Pic­ture: THINKSTOCK

Pic­ture: THINKSTOCK

Pic­ture: THINKSTOCK

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