Taking Profits

Who’s afraid of shareholder activism?

What is the proper response to poor returns and corporate management that’s not “fit for purpose” in a public company?

Which way to the Extraordinary General Meeting?

There is a tendency in some quarters to react with shock and horror at the appearance on the horizon of activist shareholders. What do they do that causes such out-sized concerns? First, they build up a stake in a publicly traded company by purchasing shares in the market from willing sellers at the current clearing price. Second, they use the voting rights that are inherent in these shares to exercise oversight over the board of directors of the company. Neither are illegal or immoral or in contravention to the long history of corporate governance. Rather than being “absentee landlords,” these investors want to exert control over their investment.

However, when faced with agitation and awkward questions and demands for change, management often may be tempted to distract attention away from their own poor track record and instead allege that it is the activists themselves that are cause the problems. “Everything was OK until THEY showed up,” or sentiments to that effect.

In recent months, Australia has become much more familiar with shareholder activism, and that trend doesn’t appear likely to change anytime soon. Otherwise placid and contented companies are finding themselves the battleground between entrenched management and shareholders eager to shake things up a bit. These companies can be grand-old-names or media darlings. Washington H. Soul Pattinson & Co and New Hope Corp were just two recent examples. In either case, the underlying motivation is to expose the true cause of lagging performance and craft a package of measures that will lead the company in question back to long term productivity.

Of course, contests for corporate control should be played out in the open, subject to rules and oversight that ensures that the other shareholders have adequate information to make their own decisions about both the future of the company and the real value of the shares that they hold. Australia has such a system in place, with a 5% threshold to call a board meeting and a 20% threshold to conduct a full tender offer for the company.

The reason that companies elect to list their shares on exchanges is that they want to give prospective investors an easy means to acquire shares and existing investors the freedom and flexibility to exit at a time and a price of their choosing. Shareholder activism is in many ways no more than a logical extension of these two basic ideas.

It is worth bearing in mind that every transaction in shares is a fundamental disagreement about the future prospect of the company. A seller is thinking that there is little room for future growth in the value of these shares and, at a certain level, the buyer is foolish for thinking otherwise. At the same time, the buyer sees massive upside in shares and is confident that the price will increase in the coming weeks and months, making the seller equally foolish for exiting at this late stage. As a result, a stock market is as much a market for opinions as it is a market for the actual shares.

In short, shareholder activists are expressing views in contradiction to the established views of both the market and the management. Sometimes they win, sometimes they lose. But in the long term, market participants tend to benefit more from legal rights of share ownership that are exercised, than from those rights that are left fallow.

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