Keeping executives on their toes is good for everyone
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.”