Proxy Fight in Australia

Mooted reforms to proxy legislation in Australia may put a muzzle on shareholders due to increased disclosure requirements between proxy advisers and fund managers.

The right to speak freely. It is the foundation of democracy and a market-based economy. But it is under threat right now if the Australian Government’s proposed changes to proxy reform are anything to go by. Treasurer Josh Frydenberg and his department are on a rampage.

Proposed changes include forcing proxy advisers to give listed companies a week’s notice before they send voting recommendations to clients (fund managers), plus, the research on which their decision is based. Also, proxy firms would have to give clients access to a company’s response. 

But the most spirited proposal is a measure that would force proxy firms to be independent of super funds. That’s an instant farewell party for the Australian Council of Superannuation Investors (ACSI). ACSI advises funds that control about 10% (on average) of all top ASX200 companies. Problem is that ownership of the firm lies with 36 institutional investors (mostly local industry super funds) with assets of more than $1 trillion combined. Goodbye ACSI. Is independence the sole determinant of good advice?

Other players in the proxy adviser space include Ownership Matters, CGI Glass (a branch of the San-Francisco based advisory) and ISS—majority-owned by Deutsche Bourse Group. Mr Frydenberg wants to increase the transparency of these advisory firms in a misguided attempt to increase the transparency and accountability of proxy advice. Why? They are considered too influential when it comes to corporate governance in Australia. And we have a high degree of institutional investment in Australia owing to compulsory super.

A Driver’s Licence

The fact none of these advisory firms require a Financial Services licence is another point of concern for Treasury and company directors. Going forward, this might change. A Treasury consultation paper says there is “insufficient public information today to determine whether superannuation funds, in this area, are acting in a manner consistent with their legal obligations.”

Licencing aside, the proposed changes to the regulation of proxy advisory firms all add up to more costs, more headaches, and sadly, less incentive for funds to stick their neck out on crucial voting issues. We can see the cushy Australian corporate director club looking on with a wry grin. Superfund members and shareholders will start to bear the cost of this heightened transparency in the form of higher fees and higher expenses for corporate governance.  

The Old Days

So just when it was looking like things were changing for the better on the ASX (growing shareholder activism), it appears the days of sleepy boards and nonchalance for shareholder rights will continue.

From our point of view, there is simply no evidence to support the grievances of company directors who believe they are shackled by dissenting proxy advisory firms. According to an ASIC review conducted in 2017, proxy firms recommended “against” votes in 12 per cent of resolutions put forward by ASX200 companies. Not all of them—12 per cent of them. And of the 12 per cent, only 17 per cent on average received a dissenting vote from shareholders.

Does this demonstrate a heavy-handed and unnecessary influence by proxy firms? We think not. There were also reports during the 2017 AGM season of large institutional shareholders who decided to vote against resolutions that were the subject of a ‘for’ recommendation by proxy advisers. This is consistent with representations made to ASIC by institutional shareholders that they do not follow proxy advisers’ recommendations automatically.

Further, a recent article in the Financial Review showed 96.2% approval for 7,500 non-executive director elections over the past decade. Only 6 candidates were defeated. And “no board of an ASX 300 company has been spilt following a second-strike vote, and of the 1321 resolutions proposed by ASX 200 companies in 2020, only 36 votes went against the company.” Yes, a grand total of 36.

Follow the Leader

It seems we are walking in the footsteps of US Securities Exchange Commission who last year introduced reforms requiring proxy materials be filed early to give companies time to respond to proxy recommendations and requiring proxy firms to disclose any conflicts of interest (like reforms introduced in Britain a year earlier).

Proxy advisers in Australia have obligations under the Corporations Act to ensure any financial services are efficient, honest, and fair, while they must not mislead or deceive in any activity. Let’s hope it remains that way.

Otherwise, we see shareholder rights being weakened, with a shaky and generic superannuation fund voting system to follow. A diversity of views is surely an essential component of good governance. If those views are cancelled then we are taking a step backwards, not forward.

Australia does not have any protections of free speech by law, but this does not mean it should reduce the ability of advisors and their funds to cast their opinion. The Member for Kooyong, please let market participants speak freely when it comes to corporate governance.

The Activist Tackling an Oil Giant

How a minnow activist is tackling complacency inside a titan of the oil industry.

Exxon Mobil is a big company. It has a market cap of about US$260 billion. Australia’s mining giant, BHP, has a market of US$185 billion in comparison.

So when you make a declaration to challenge one of the biggest companies in the world then you’d want to be sure of yourself. A new hedge fund formed in December 2020 appears to have this surety in spades. The fund goes by the name Engine No.1 and was founded by an investor named Chris James— along with two other veterans of the hedge fund industry.

Some Clout

According to Engine No.1’s website, Chris has a history of building “asset-heavy companies in industries in transition.” He’s also been an investor in the tech sector for nearly three decades. 

Prior to Engine No.1, Chris was the founder of Partner Fund Management (PFM) and co-founder of Andor Capital Management. PFM is based in San Francisco while Andor is a VC fund based in New York.

Andor was shut down in 2016 by co-founder Daniel Benton—the second time in a decade the fund had been shut down (the fund was also shut during the GFC in 2008). The firm had a successful run for 15 years though and Benton now runs his own private family office called Benton Family Office.

Benton has been described as, “one of the top technology investors of his generation.” But what of Chris James? He is the main man taking on Exxon Mobil after all.

Well, Chris has built a career growing companies from the ground up in multiple industries it seems. Not only multiple industries, but industries in the process of long-overdue transition—like oil & gas.

Widening Scope

The major theme Chris has noticed during his career to date is ‘too many companies who fail to factor in external forces—like their impact on the environment. He believes a company’s performance and its broader external impact are ‘intrinsically linked.’

A natural target for this view and Chris’s new fund is oil giant ExxonMobil.

You could argue no public company in the history of oil and gas has been more influential than ExxonMobil. To give some context, the company was the largest company in the world by market cap only 10 years ago. It was the largest company in the Dow Jones Industrial Average for a long time too. Prior to Engine No.1’s latest campaign though, ExxonMobil’s market cap has halved, and it has been booted from the Dow Jones all together.

ExxonMobil - once the largest company in the world.

And all this sloth against a backdrop of growing oil and gas demand the past decade. Engine No,1 in its capacity as a new breed of shareholder activist believes ExxonMobil has been bereft of a ‘credible strategy to create value in a decarbonizing world.’

Changing Tide

One thing is clear, the industry and the world ExxonMobil now operates in are changing. ExxonMobil must change as well.

We think Engine No.1 might be onto something in this case. Of note is the fact Engine No.1 has achieved almost immediate results after sending a letter to Exxon’s board on December 7, 2020.

Chris and his team went straight for the jugular. They demanded a new focus on clean energy and changes to the 12-member board of directors at Exxon. It was a bold move for a company with just a 0.02% stake in a $260 billion company.

A Rebuttal

The ExxonMobil board refused to commit to a carbon-neutral strategy after reviewing the letter. And the arm wrestle began. Engine No. 1 formally launched a proxy battle in March 2021 with a view to forcing a change of direction.

All this from a small activist born months ago, against a company who can trace its history back to 1870, when John D. Rockefeller founded the Standard Oil Company.

Engine No.1 has since secured two crucial board seats in a huge win for the activist. It wants four seats in total but two is a good start. Their other objectives? They want ‘corporate governance reforms, a review of Exxon’s climate action plan (and its impact on the company’s finances) and greater public disclosure of its environmental and lobbying activities.’

That is a big roster of changes. But even before the vote, Engine No.1’s campaign was clearly having an influence on Exxon. In the past few months, ‘Exxon has proposed a $100 billion carbon capture project in Houston and committed $3 billion to low-emission technologies through a new venture,’ according to news site Penn Live.

Exxon denies any of these investments were due to pressure from Engine No. 1. That is hard to believe.

These are some of the biggest investments Exxon has proposed in sustainability in recent years, and they came right after Engine No.1 popped on the scene and post the election of a new U.S. president who has made fighting climate change a priority.

Pensions Onboard

Engine No.1 has also elicited support from other major Exxon investors, like the California Public Employees’ Retirement System and the New York State Common Retirement Fund. Both these pension funds have been laying pressure on Exxon to do something about its lagging (non-existent) sustainability strategy for some time now.

But who really cares you might say? All this demand for change is straight out of the hedge fund playbook, right?

Well, yes. But the difference, in this case, is the emphasis Energy No.1 is putting on sustainability and a clear connection between sustainability and long-term profits. And it makes a strong case that the reason Exxon’s financial position has been deteriorating is because of its failure to invest in low-carbon technologies.

Exxon has clearly been focusing on short-term gains from fossil fuels at the expense of its long-term future in a global economy. The economy now puts a premium on sustainability and a penalty on carbon-intensive activities like the production of oil & gas. The switch to long-term gains in favour of short-term profits is long overdue.

Adding might to the fight, the willingness of U.S. pension funds and BlackRock ($7.4 trillion in assets under management) to support Engine No.1 shows the tide is turning. The Exxon board might finally be waking up as a result.

David vs. Goliath?

The significance of David taking on Goliath may not be the story here after all. Is it more about the sheer weight of activist funds leading pension funds toward sustainability?

Either way, companies and executives that fail to invest in the transition to low-carbon energy will increasingly risk the assault of hedge funds and pension funds (super funds in Australia). And Super funds are armed to the brink with a continuous flow of money that may choose to tail the efforts of activist investors.

Despite its initial pushback against Engine No. 1, the board of directors at Exxon Mobil has clearly been shaken. The flood gates may be opened on other industry laggards who are yet to articulate how they fit into a global economy with a firm eye on sustainability.

UPDATE: Shareholder Activism in Australia (Q1 2021)

It’s been slow going for shareholder activism across the globe so far in 2021. The coronavirus pandemic put a dampener on activity during 2020 and continues to make its presence felt. Activists have become a little gun shy it seems as companies deal with the ongoing fallout from the pandemic. 

Despite this, Australia was second only to the US in terms of overall activity. Companies making headlines with activists on the ASX included Woodside Petroleum, Tabcorp, Santos, Rio Tinto, AMP, Bank of Queensland, among others.  

Data from London-based research firm Insightia make the picture clear though. Their recent report covering the first quarter of 2021 shows[1] : 

• The overall level of activist activity across the globe was the lowest in the past seven years with 247 companies publicly subjected to activist demands (versus a high point of 385 in the first quarter of 2016).

• Activist activity continues to be highest (by a stretch) in the US, followed by Australia and Japan.

• In the US, 169 companies were targeted.

• The next most active regions were:

  • Australia (12 companies targeted)

  • Japan (11 companies targeted); and

  • Canada, UK, the Republic of Korea (all with 8 companies targeted).

• Activity was lowest in Malaysia, Austria, Finland, Czech Republic, and New Zealand (all had only one company targeted during the period).

Figure 1: Australian Activist Targets SOURCE: Activist Insight report from Insightia

The stats say a lot about the level of activism in the U.S. versus Australia and the rest of the world. You could almost say activity is non-existent outside the US based on the figures above. But the two-strikes rule and other regulations on the Australia Stock Exchange (ASX) are clearly a stimulant for activity in our own backyard.  

The basic materials and technology sectors on the ASX were the most targeted. Each sector accounted for 25% of the overall total number of companies targeted. In terms of demands on ASX-listed companies, demands on boards were the most common, accounting for 47% of demands overall.  

In addition, activists in Australia have so far secured six board seats. 50% of these board seats were secured through settlements.  

Going After the Nano Caps 

Nano caps on the ASX are copping the brunt of shareholder activist demands and appear to be sitting ducks for larger fund managers who can influence a vote with a minimal investment relative to the size of their funds under management. 

The following graphic makes this clear:

Figure 2: Nano caps still account for more than half of activity happening on the ASX but demands are still well below prior quarters from the last three years. SOURCE: Activist Insight report from Insightia.

Having an Impact

Of note from Insightia’s report was the number of impactful campaigns by Australian companies in the first quarter.

The average impact versus total campaigns launched averaged 25% over the past five years but this figure is already at 50% after the first quarter of 2021 (6 out of 12 campaigns were considered ‘impactful’ by Insightia data).

Figure 3: 6 out of 12 campaigns launched in Australia in the three months to March had a direct impact on listed companies.

Providing Some Definitions

Providing some clarity in Insightia’s first-quarter report were the definitions they provided at the beginning regarding shareholder activists.

These definitions may help to clarify where Advocate Strategic Investments (ASI) sits among the global cohort of activists. The definition of an activist was spread among three categories:

1. PRIMARY FOCUS ACTIVIST: AN INVESTOR WHICH ALLOCATES MOST, IF NOT ALL OF ITS ASSETS TO ACTIVIST STRATEGIES.

2. PARTIAL FOCUS ACTIVIST: AN INVESTOR WHO FREQUENTLY EMPLOYS ACTIVIST INVESTING AS PART OF A MORE DIVERSIFIED STRATEGY.

3. OCCASIONAL FOCUS ACTIVIST: AN INVESTOR WHO EMPLOYS AN ACTIVIST STRATEGY ON AN INFREQUENT BASIS.

We have bolded the definition that best suits ASI. We plan to work constructively with listed companies on the ASX to help shareholders realise long-term value in their shareholdings.

REFERENCES

[1] https://www.activistinsight.com/resources/reports/