Why Shareholder Activism Remains in its Infancy in Australia

Investors on the ASX feared an all-out assault when BHP Billiton was raided by an infamous New York-based hedge fund in April 2017.

But the attack from Elliot Management failed to spark any major revolt among retail or institutional investors. And the introduction of new investment managers focused on activism has been tepid.

In fact, you could argue there are less than a handful of true activists in Australia to this day. They include the Tenarra long-short funds, the 360 Capital Active Equity Value Fund, Sandon Capital, Viburnum Strategic Equities, and Armytage Microcap Activism Fund.

You could throw in other part-time activists who allocate a smaller piece of the pie to activism. Doing this would include the likes of Geoff Wilson’s Wilson Asset Management, Allan Gray, Perpetual Limited, Tribeca Investment Partners, and VGI Partners.

Still, less than a dozen activist managers all up. Of course, there is a lot of influence behind closed doors in corporate Australia. But it is impossible to track. We will leave the shadow influence out for now.

Why Not More?

Well, there are three major reasons we believe activism remains a dark horse in Australia. They include:

1. An unhealthy acceptance of underperforming management teams among fundies and investors

2. A level of ‘corporate caginess’ among managers when it comes to transparency

3. A lack of support for managers who have been inserted as would-be activists on the boards of listed companies

These problems exacerbate in the form of little marketing of shareholder activism as a strategy. Or even a viable segment of investment management. Throwing all this into a pot means you’ve got an industry lagging its big cousin in the U.S.

In our defence, we are second in the world when it comes to activism. Even Japan (11 campaigns in the first quarter of the year) cannot match our level of activity (12 campaigns) despite the size of their market (Japan has a market of US$5.7 trillion vs the ASX at US$2.8 trillion).[1]

A Long Road Ahead

The tinder is flaming on the ASX you might say with favourable laws in place like the two-strikes rule and a 5% vote required for an EGM, but we have a long way to go.

Research by the lead trackers of activism across the globe, Activist Insight, found there were 62 activist targets in Australia in 2020, well down on 2018's record of 81 targets and down more than 10% from 2019 (73).[2]

At least two-thirds of the actions were board-related and were mostly isolated cases of outrage against generous performance and pay incentives.

Only 10 percent of targets were called out on issues regarding business strategy. As above, 10 percent might be understating the extent of rumblings behind closed doors between shareholders, management, and boards.

More Talking Please

One thing is clear though: the advent of Australia's two strikes rule, which can trigger a board spill if more than 25 percent of shareholder votes reject the remuneration report two years in a row, has forced directors to increase their dialogue with shareholders. Some directors like this. The majority don’t (especially where an entrepreneur-founder is non-existent on the board of directors).

But this new rule has created a grey area for the scope of shareholder activism and its definition. Going after a campaign based on pay and bonuses is reactive and therefore not a true form of activism. Why? Reacting to events ex-post does not unlock material value in a proactive manner. That is the whole point of activism.

Remuneration campaigns are short-term fixes as well. Any dispute is typically settled by way of shareholder rights provisions that exist in Australia.

In contrast, true activist campaigns tend to focus on structural and/or strategic issues. In most cases, these actions have a more significant impact on value creation for all stakeholders in a listed company.

Looking Way Down the Road

True activist campaigns are proactive in nature almost always take a long time to implement. A high degree of expertise and staying power is required for shareholders and management to achieve their desired outcome as well.

The key is changing the perception of activism and showing boards how effective an activist campaign can be in the presence of an open dialogue between key stakeholders.

Gone are the days of the corporate raider. The modern shareholder activist is making the transition from ‘thorn in the side’ to trusted confidant and value creation specialist.

May we see more activist campaigns running on the ASX soon.

[1] Data from Insightia report, “Shareholder Activism in Q1 2021” and Wikipedia.

[2] Data from Insightia report, “Shareholder Activism in Q1 2021.”

Why the ASX is Ripe for Shareholder Activism

Gone are the days of the corporate raider stripping assets from profitable companies in the name of personal profit. The new kid in town is the shareholder activist. Activists are relatively new (in the history of financial markets) but highly influential players when it comes to listed securities. Their strategies and actions are wide and varied.

In fact, activists are growing by the dozen if recent data are anything to go by. Figures from a Credit Suisse report published in 2019 show the number of activist campaigns ballooned in the decade from 2009 to 2019 from 25 to 930 at the end of 2018.[1] And for the first half of 2019, the figure was already sitting at 646.

Activity has slowed a lot since the onset of a pandemic, but momentum is starting to build again. Evidently, you could say the main distinction between the activist and the corporate raider is the intent to work in a constructive manner with listed companies to realise shareholder value. They can still be the proverbial ‘thorn in the side’ but in a much nicer way.

The ASX… Ripe for the Picking?

While the level of shareholder activism in Australia pales in comparison to the U.S. (169 campaigns in the U.S. in the first three months of 2021 versus 12 on the ASX)[2], we still have the second most active market in the world for activism (just ahead of Japan). There are three main factors driving this activity down under including:

1. The ‘Two Strikes’ Rule on the ASX

   • This rule allows just 25% of shareholders to vote down a company’s remuneration report and ultimately spill the board of directors (there is no such tool for activists in the U.S.) 

2. Only a 5% vote to call an Extraordinary General Meeting (EGM)

   • Adding to this rule, recent amendments to regulatory guidelines now allow shareholders of ASX-listed companies to talk to each other about company performance. 

3. Large Institutional Shareholdings

   • This is self-evident given the size of our superannuation pool. Back this with a strong media presence which can quickly affect the reputation and share price of companies in a matter of minutes.

Picking on the Little Kids

The market cap of companies engaging in activism on the ASX is skewed heavily towards the nanocap end of the market (42% in Q1 2021) with an increasing focus on board-related activism (47% of demands in Q1 2021).[3] While the bias for picking on the little kids has always been present in the Australian market, there have been short periods where activity has migrated to large caps. A good example was the period from 2014-217. That trend reversed sharply in 2018 though and has continued since then.

Obviously, size matters in terms of any news getting picked up by the media, so the nano and micro-cap stocks who end up in the crosshairs of shareholder activists barely register a blip in the major metro news columns—unless there is a particularly salient angle or agile media professional supporting the efforts of activists.

The media trend is starting to shift with some large caps making headlines in the first quarter of 2021. They include Woodside Petroleum, Tabcorp, Santos, Rio Tinto, AMP, and Bank of Queensland, and others. We expect this increased share of media coverage to continue as activists stake their claim on the ASX.

Looking Forward at Shareholder Activism on the ASX

The current 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. Watch this space for some exciting (constructive) battles ahead.  

REFERENCES

[1] Data from Credit Suisse 2019 Fourth Quarter Corporate Insights report titled, “Shareholder Activism: an evolving challenge.”

[2] Data from Insightia report, “Shareholder Activism in Q1 2021.”

[3] Data from Insightia report, “Shareholder Activism in Q1 2021.”