Why Australian investors are turning into activists

Summary: Australia is a small player on the global stage, but not when it comes to investor actions against companies.

Key take-out: The royal commission has proved that investors are not willing to put up with poor board behaviours.

As the Hayne financial services royal commission conducted its public hearings across Australia last year, a parallel round of private meetings took place involving the world’s biggest investors.

Collectively managing more than $US16 trillion ($A23 trillion) in assets globally, and holding key stakes in Australia’s listed banks and insurance companies, representatives from the “asset stewardship” teams of BlackRock, Vanguard and State Street took turns visiting senior executives from the major banks and AMP.

It should be noted that regular high-level meetings between the so-called “big three” fund managers and our larger companies are not irregular. In fact, they happen at least once a year, and focus on what measures are being taken to deliver long-term growth to shareholders.

But, in the shadow of the royal commission and the flood of damning evidence exposing widespread cases of financial misconduct at the banks and the big insurer, the round of Australian stewardship meetings in 2018 had a very different backdrop to the catch-ups that normally occur.

An insight into Vanguard’s meeting with AMP is contained within the fund manager's 2018 investment stewardship report, under the heading: “After failings and turmoil, resignations from a board”.

Without naming AMP, Vanguard states: “After numerous governance failings and a public investigation at an Australian financial services company, we engaged with the board to understand its perspective on the firm’s business practices and organisational culture, and specifically on how the board would ensure a rigorous oversight process moving forward,” Vanguard states.

“Our engagement occurred during a time of great turmoil among the board and executive ranks. We challenged the board on its awareness of and responsiveness to these matters. Given the severity of the situation, we concluded that the board lacked sufficient oversight of and accountability for management.”

Only days later, in May last year, AMP announced the resignations of its chair Catherine Brenner, chief executive Craig Meller, and several other directors.

The “big three” wield a lot of power, but ultimately they are long-term investors. As such, they are not shareholder activists in the same vein as those who buy stakes in companies with the specific aim of forcing through boardroom and operational changes so they can later exit their positions with a healthy profit.

Yet, a new report released this month – coincidentally on the same day as the joint resignations of NAB chair Ken Henry and its CEO Andrew Thorburn – shows shareholder activism in Australia is on the rise at all levels, and investors are ready and more willing than ever to vote against company boards.

Another clear sign of that came in December when an overwhelming majority of shareholders in both Westpac and NAB (including the “big three”) voted down the banks’ remuneration reports at their respective annual general meetings.

The Activist Investing Annual Review 2019, produced by US-based shareholder activism research group Activist Insight and specialist law firm Schulte Roth & Zabel (SRZ), shows that Australia experienced a record high number of activist engagements in 2018, with 78 companies targeted – a 28 per cent increase on 2017.

Not only that, Australia ranked second in the world in 2018, with the highest number of activist engagements outside of the US.

We outpaced Canada (75), the UK and Japan (both 47), and equalled the combined activist action totals for Germany (15), China (13), Singapore (11), South Korea (11), Poland (10), Switzerland and Hong Kong (both 9).

While large ASX companies were key investor targets here, nearly two-thirds of them had market values of less than $50 million. The bulk of these actions were launched against small mining companies.

In its forward to the report, law firm SRZ says the rise in investor activism, led by 491 actions in the US, is largely a case of success breeding success.

“As activists continue to secure board seats and strategic and operational improvements in the United States, developments in European activism have accelerated,” the report says. “Companies targeted by activists have become more likely to settle rather than risk losing a costly proxy fight. And activists have embraced M&A-related strategies to increase share prices.”

There was an upsurge in M&A-related activism in 2018, with activists frequently speaking out against acquisition offers they felt undervalued the targets in a bid to secure a higher sale price for shareholders.

The report also notes that many companies took a different approach in 2018 than in prior years, often choosing to settle with their activist shareholders rather than engaging in drawn-out campaigns.

Activist Insight quotes Sydney-based activist investment group Sandon Capital, which has been involved in campaigns against Fleetwood Corporation, Specialty Fashion Group, Watpac, Iluka Resources and Tatts Group, among others.

Sandon’s managing director, Gabriel Radzyminski, says he hopes to resolve some ongoing campaigns in 2019 and believes Australia will present “phenomenal” opportunities, thanks to a combination of “pockets of undervaluation” and a potentially strong M&A market.

“The private equity guys will be able to offer significant premiums to the market, but even those premiums will be a discount to the true worth of those companies,” Radzyminski says.

Analysts and advisers anticipate an increase in transactional activism, specifically in the mining and energy industries. Also, as markets become more volatile, combinations of activism may become more achievable.

“With a lot of stocks getting beaten up, there’s certainly opportunity for activists to push companies for M&A activity,” says Paul Schulman, managing director and executive vice president at MacKenzie Partners.

Activist Insight predicts that environmental, social and governance issues will remain a consistent theme in 2019, and that activists may push for transactions “at an even more furious pace as credit markets tighten and the outlook begins to darken”.

So far this year, in Australia at least, the level of investor activism remains fairly sedate, aside from the heated campaign around the ALP’s proposal to scrap dividend franking credits.

The votes for and against that plan will ultimately be cast by shareholders in the polling booths at the next federal election.