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PW6

COVER STORY
SEPTEMBER 10
2018

THE IMPACT OF
SHAREHOLDER
ACTIVISM
S
B Y TA N Z H A I Y U N
Primary geographies for activism activity in Asia (2011-2017)
hareholder activism has been on the
rise in Asia since the 2008 global finan-
cial crisis, due in part to the greater
push for good corporate governance
and the protection of minority share-
holders. This tide of activism brings 92 / 24%
with it various implications for investors, rang- 24 / 6%
47 / 13%
ing from share price movements to corporate
governance reforms. I think
Last year,four of the 10 most targeted countries you will start to
(excluding the US) by activist investors were in see more 87 / 23%
this region, where campaign volume has seen activism 38 / 10% Total # of campaigns = 376
a compound annual growth rate of 48% since whenever there
2011, according to a JP Morgan report in May. # of activist campaign /
is dilemma for % of total Asian activity13
According to the report,activist assets managed management
by hedge funds reached a record US$125.6 billion that stalls Activism activity
in December last year, up 4% from 2016.Also, the 64 / 17%
corporate
number of international campaigns exceeded
those in the US for the first time. decision- Lower Higher
“Broadly speaking, activism has been on the making.
JPMORGAN
rise since the global financial crisis as part of the > Black
circular change on how the wider investment
world views its role in managing companies. Financial Services Pte Ltd. Activist hedge funds usually acquire a signif-
There has been a view that the board may man- “These activities will only increase in the fu- icant amount of shares in a company that they
age the company,but shareholders have a greater ture due to the evolution of financial markets.The think is undervalued.After acquiring the equity,
role to play in overseeing the board,” says Josh US and European markets serve as a precedence they launch campaigns to force the company
Black, editor-in-chief of Activist Insight, a publi- to what will happen in Asia.” to adhere to their suggestions. Meanwhile, in-
cation based in New York and London. The Judah Value Activist Fund invests in the stitutional investors could partner hedge funds
More activism campaigns could occur going Hong Kong and Singapore markets. It currently or announce their intent to vote a certain way.
forward due to the strong economic growth, he has US$44 million under management and tar- According to Moermann,activist campaigns
adds.“This creates more opportunities for activ- gets annual returns of 20% to 30%. will always be present as long as there are com-
ists to say they should do this or that, or point Activism can be defined as any type of investor panies that are being run inefficiently. Quarz
out underperforming companies that still have influence on a company’s decisions, including invests in companies around the world and in-
cash and can return it to shareholders, invest it institutional investors that recommend the other cludes the likes of Apple and Switzerland-based
or become a takeover target. There are far more shareholders vote a certain way. However, some Coltene Holding in its portfolio.
options when companies are doing well, and I associate this more commonly with hedge-fund “Activists are just shareholders who are willing
think you will start to see more activism when- activism,where the funds acquire shares of the to speak up and improve shareholder value.Many
ever there is dilemma for management that stalls target company and issue various demands — at small shareholders invest their hard-earned re-
corporate decision-making.” times using aggressive or controversial methods tirement funds in companies that languish for a
According to the Activist Insight Half-Year — to increase shareholder value. long time and do not increase dividends or grow
Review 2018, most of the global activism centred A recent example in Malaysia was the Minor- their share price,” says Moermann.
on dual-class share structures, mergers and ac- ity Shareholders Watch Group’s vote against the “We help investors by stepping up to the task,
quisitions (M&A) and gender diversity, along re-election of two independent directors of Sapu- raising our concerns and making recommenda-
with a shift in attention towards environmental, ra Energy Bhd and payment of their benefits in tions to increase shareholder value.Small share-
social and governance (ESG) issues.In Asia,there July, due to excessive remuneration of the CEO. holders, in my view, should always do their own
was a rise in activism that targeted companies’ The Employees Provident Fund was reported to research before making investment decisions,
business strategies and a decline in those seek- have backed this move. but they can also follow activists to see what
ing boardroom representation. Other issues often brought up by activists are they propose.”
Foreign activist funds such as Third Point the return of excess cash to shareholders, proxy
and Elliott Management Corp are increasingly fights to place a representative on the board or GROWTH FACTORS
targeting Asian companies as the US market has M&A suggestions. There are several factors driving the growth
reached saturation point. But the bulk of share- “We do not draw a strict line here as everything of shareholder activism in Asia, including the
holder activism in Asia is still undertaken by from actively speaking to the board,shareholders demand for good corporate governance and the
domestic activists. and management to proxy fights is essentially ‘ac- protection of minority shareholders.That is why
“Shareholder activism is on the rise in Asia, tivism’.Some activists like to work behind closed most of the activity in the region occurs in de-
but mostly in South Korea and Japan due to the doors and nobody knows they are ‘activists’ while veloped markets such as Singapore, Hong Kong,
maturity of their corporate governance frame- others are more vocal about their engagements South Korea and Japan, which have introduced
works. That said, other parts of the region are and receive more media coverage,” says Jan F corporate governance and stewardship codes
also seeing an increase in such activities,” says Moermann, chief investment officer and man- in recent years.
Roland Jude Thng, who runs the Judah Value aging director of Quarz Capital Asia (Singapore) Japan’s Prime Minister Shinzo Abe has em-
Activist Fund of the Singapore-based Swiss-Asia Pte Ltd, an activist fund based in the city state. braced shareholder activism as part of his eco-
PW7
SEPTEMBER 10
2018

nomic policy.In the past,many activists avoided company private at a cheap price, which hurts
Asian markets due to their lack of transparency the small shareholders.We increase volume and View of shareholder
and weak corporate governance, according to liquidity, close information asymmetries and
various reports. But now, companies with these increase value for all shareholders.” activism is changing
weaknesses have become attractive targets. Thng made his move to activist investing
“Western investors are probably looking at in 2014, when he noticed a number of under-
countries with greater political momentum valued investment opportunities in Singapore. Most people associate shareholder activism
behind good corporate governance. In Japan, That was when he founded activist hedge fund with hedge fund activist investors such as Carl
you have the Abe reforms and in South Korea, EVA Capital SP. Icahn, who has been called a corporate raider for
you have the anti-chaebol movements.They are To Thng, the discrepancy between share his hostile takeovers; Paul Singer, whose Elliott
also probably looking for countries with a looser price and value is a signal for investors to take Management fund uses many confrontational
monetary policy,” says Black. a deeper look. “We primarily set our sights on tactics, including public letters, presentations
For instance, US-based giant activist fund companies in the small and mid-cap space with and litigation; and Dan Loeb of Third Point, who is
Elliott Management urged automotive con- strong balance sheets. My focus are small and notorious for writing harsh letters to companies.
glomerate Hyundai last year to adopt a holding mid-caps typically majority-owned by fami- Over the years, many of these prominent
company structure and implement a clearer lies,” he says. activist investors have launched nasty
shareholder returns policy. The South Korean “I would prefer to take a stake,sit on the board campaigns that last for years, fought with
company responded to this with a plan that if possible and grow the company with the ex- companies and forced executives to step down.
addressed its concerns. isting board and management team. The basis But this view of shareholder activism is changing,
According to reports,there has been a change is always undervaluation. I can choose to sit on say some reports. Many activists are switching
in culture, where retail investors are becoming the undervalued stock or sell it immediately af- strategies to be viewed more as engaged
more aware of their rights and accepting of ac- ter the shareholder value increases.” investors. Institutional investors are adopting
tivists’ call for a move away from practices such Meanwhile, there is a growing emphasis activist tactics to push for change in their
as generational succession and nepotism. on ESG principles among institutional inves- investee companies while hedge funds are taking
“In a class of Asian students,the students are tors, whose holdings are increasingly global. longer-term horizons in their investments.
always shy to ask questions.That is just the Asian Many of them are now either engaging in ac- According to a JP Morgan report in February,
culture of subtlety.But the moment a few students tivism themselves or partnering hedge funds direct public attacks on board members are
speak up,the others are more open to talk.When to push for greater ESG performance. For ex- not as common in Asia as in the US. Calls for
there are fruitful discussions among the different ample, prominent US-based hedge funds Jana corporate governance reforms and demands
participants,new ideas may be generated,which Partners and ValueAct Capital have launched for direct shareholder representation in
benefits everyone in the discussion. That is the other funds to push companies to adopt ESG the boardroom are increasing. Return on
reason I have always encouraged shareholders practices. capital, opposition to announced mergers
to speak up,” says Thng. The world’s largest asset manager,BlackRock, and acquisitions (M&A) and interested-party
“Investors should learn about their rights. waged its first campaign against Hong Kong-listed transactions are some of the common demands
After all, it is their hard-earned cash that they G-Resources Group Ltd in February 2016, voting in Asia.
used to buy stakes in companies. Their share against its plan to sell its main asset. BlackRock Many of the activists around the world are
ownership entitles them to voice out their con- stated that investors should be compensated if shifting their campaign focus to operational
cerns.Fluctuations in share prices are not a guar- a company sells most of its main assets when it issues. Rather than demanding for higher
antee and the key is to push for improvements wants to move into another industry, according dividends or M&A, they are increasingly taking
in the fundamentals. Sooner or later, the share to Bloomberg. on longer-term issues by demanding the
price will follow.” BlackRock is an example of a prominent in- appointment of independent directors, joining
Both Moermann and Thng’s funds focus on dex fund provider engaging in shareholder ac- the board or helping to execute a new strategy,
value investing, particularly among small and tivism. Index funds have an inherent inability according to a PwC report in February.
mid-cap companies that are seldom covered. to divest companies from the indices they track, According to the global firm, companies
The presence of undervalued companies and the thus they are incentivised to increase monitor- that often become targets of activists have low
dearth of information present an opportunity ing to improve performance. market value relative to their book value, weak
for activist funds. “With index funds,it is more about the votes. company performance compared with their
“Especially in Singapore and Hong Kong, They are doing it to win the votes of the top inves- peers, but are profitable with good operating
activists find undervalued, high-quality com- tors.Activists are working closely with pension cash flow, return on assets and excessive cash in
panies compared with those in the US and the funds,just like Jana and the California teachers’ hand. Companies with diverse businesses with
European Union. We only invest and get active pension fund. They ran a campaign on Apple one line that is underperforming or a line that has
if the companies are very undervalued and in- in January for more parental controls on the a different growth potential are also attractive
active,” says Moermann. iPhone [for example],” says Black. targets, as well as those with board compositions
“In Asia,a lot of companies are kept underval- Much research has been done to determine that do not meet governance standards.
ued so that the majority shareholder can take the CO N T I N U E S N E X T PAG E

The Malaysian perspective


The Minority Shareholders Watch Group performance of companies and lower necessarily be in regard to voting but more However, the independent director
(MSWG) was established in Malaysia shareholder returns, Lya observes. The on the poor financial performance, no or was still re-elected narrowly. “But a strong
specifically to protect the interests of addition of more rules to Bursa Malaysia very little dividends declared, excessively message has been sent by the shareholders
minority shareholders by engaging in Listing Requirements, Malaysian Code on high cash holdings not deployed for better that they are not happy with the directors’
shareholder activism. Corporate Governance and Sustainability investments, unusually high gearing, high actions based on the concerns raised. Do
General manager Lya Rahman says Statement and Guidelines has also absenteeism of directors at board meetings not ignore the voice of the shareholders,”
shareholder activism is rising in the country. contributed to the trend. and unusually long tenures of independent says Lya.
“In the past, investor activism usually “Vote ‘no’ campaigns are becoming more directors.” Meanwhile, Pong Teng Siew, head of
took the form of private engagements, common even though in many instances, A recent example took place in July research at Inter-Pacific Research Sdn Bhd,
especially in Asia, where there is cultural the resolutions could still be carried out when MSWG opposed the re-election of says individual investors should do their own
aversion to public confrontation. Therefore, due to the substantial shareholding of two independent directors at Sapura Energy research and decide whether the activist
investor activism seemed to be more major shareholders. Nevertheless, Bhd. “Many shareholders, including MSWG investors’ claims are justified. For instance,
suppressed and not well known as there could be times when the poll and some institutional investors, were not the call for companies to pay out excess
it was carried out behind doors. results show a high percentage of happy with the excessive remuneration cash as dividends may not be good in some
Moreover, as Asian companies shareholders voting against the received by the group CEO despite the circumstances.
are often tightly held, it is much resolutions. At least, a strong group incurring substantial losses. At the “There are reasons why the company
more difficult to successfully push message is sent to the company’s annual general meeting, many shareholders may be trying to conserve cash, either in
for change in some markets in the board and management,” says Lya. raised their concerns and even bombarded preparation for a merger or acquisition or
region.” But voting on resolutions is not the board with sharp criticism,” says Lya. to tide it over in difficult times. If they feel
The factors that have the only thing that triggers “For the first time, institutional investors strongly enough, then by all means attend
driven shareholder activism in Malaysia, she joined hands with retail investors to the annual general meeting and make the
activism in Malaysia adds. “In some instances, undertake shareholder activism. We did votes count. But for individual shareholders,
include a greater activism may not not vote against the CEO because it is not it may be more difficult to organise
awareness of his fault for getting the high salary. It is the themselves as a group and gather enough
shareholder rights, fault of the board and the members of the shareholders for their weight of votes to
the poor financial remuneration committee.” count,” says Pong.
Lya
MOHD SHAHRIN YAHYA/THE EDGE
PW8
SEPTEMBER 10
2018

Impact on retail investors


F R O M P R E V I O U S PAG E PepsiCo in 2016, the multinational com-
the impact of shareholder activism. As Great value themes as a % of total activism activity (2011-2017) pany had addressed many operational
a World Economic Forum article pub- Capital structure Opposition to announced deals Corporate strategy
weaknesses identified by the fund and
lished in August last year points out, that had contributed to its positive per-
shareholder activists can be destruc- formance over the years.
tive if they push for higher short-term 24% 14% 13% Nevertheless, Black believes that
returns at the expense of the company’s shareholder activism will not cause
long-term growth. the economy to suffer or force compa-
Some say the methods used by activ- nies to focus more on short-term gains.
ist hedge funds could have a negative “That is probably a risk if there are too
impact on company morale. According many inexperienced players putting
to news reports, hedge fund campaigns • Return capital to shareholders • Oppose acquisition • Spin-off business themselves out there as activists and
have sometimes landed in controversy • Restructure debt • Oppose merger • Split company trying to influence companies without
due to their aggressiveness in pushing • Other capital structure • Oppose transaction terms • Divest assets / holdings a deeply informed view of how compa-
their agenda. related items • Seek sale or merger nies should be run. But we do not have
That stereotype involving hedge fund JPMORGAN so much risk with the larger activist
activists is present globally, Thng ob- funds, which by and large are better
serves. “Our fund simply believes in shareholder value and increases ESG outperformed the S&P 500 and industry informed and have a lot of research
doing what is right — long-term value ratings. Large shareholders can benefit peers three years after the campaigns capabilities,” he says.
creation where existing shareholders get from costly methods, such as independ- began. SharkWatch50 is a list of the 50
to profit together with my fund,” he adds. ent vote research, behind-the-scenes most significant activist investors. WHAT CAN INVESTORS DO?
But activist investors can provide engagement and takeover, while small “Empirical evidence has shown the Interestingly, investors can track the
analysis on the target company’s weak- shareholders can rely on exit, vote rec- positive impact of shareholder activism. activities of activist investors and ben-
nesses while long-term moderate activ- ommendations and shareholder pro- I see more benefits than risks. However, efit from their actions and campaigns.
ist investors can deter companies from posals. these benefits may be over the long term However, it can be difficult to take ad-
engaging in bad practices such as exces- According to a 2015 research article rather than the short term,” says Thng. vantage of this because much of the
sive executive compensation. in the Columbia Law Review, activist cam- Not every activist campaign is suc- gains happen before the announce-
“We sometimes see a bump in the paigns run by hedge funds do not cause cessful. But even with failed campaigns, ments are made, according to an in-
share price when an activist discloses initial positive share price spikes that are there may be positive consequences. terview on Market Watch.
a position or makes a certain demand, followed by abnormal negative returns According to reports, although Black- Some people recommend invest-
particularly if the CEO has been under- in the long run. And there was no evi- Rock failed to win the votes of the other ing in value index funds because they
whelming and the activist wants to get dence that upon the exit of an activist shareholders, G-Resources engaged in track stocks that may become targets
rid of him. The argument that it will investor, the returns slump. discussions with the firm to distribute of activists since they tend to look for
negatively affect the company would “Usually, the volume increases when special dividends after the sale. undervalued stocks. Meanwhile, a few
be that the management is distracted people start to look into the research we In some cases, the results are harder funds have sprung up to track activist
and not able to follow its strategic ob- make public.We do not let the companies to determine. For example, PepsiCo was investors. One example is the Event
jectives, and these things can last for a get away easily. Most companies prefer attacked by famous activist Nelson Peltz Driven Opportunities Fund by Fidelity,
long time,” says Black. to give something and they understand in 2012,when he pushed for the company which invests in companies that engage
According to the Activist Insight report, that in the end, the company belongs to to separate its profitable snacks division in activism campaigns and other events.
last year saw many proxy fights while the shareholders.We think the board and from the struggling beverage division. Another example is the 13D Activist
many settlements have occurred this management will be more accountable Pepsi rejected the proposal but even- Fund, which invests based on 13D fil-
year. “Settlements are probably gentler to the public and shareholders,” says tually, the adviser of Peltz’s Trian Fund ings, which is a method of identifying
on the share price, but it means less in- Moermann. Management was added to the board as activist campaigns. Investors in the US
formation is being released to the mar- However, the impact may be more an independent director. who accumulate more than 5% of the
ket because both sides are not making long term in some cases. According to Recently, outgoing PepsiCo CEO In- shares need to complete a 13D filing with
the cases fully public and the individual research by financial data provider Fact- dra Nooyi was quoted in interviews as the regulator to reveal their identity.
investor won’t necessarily get to see the Set in 2016, which looked at 269 com- saying it could have achieved its goal of Exchange-traded fund provider Glob-
counterpoints of the argument.” pleted activist campaigns launched by diversifying into healthy food and drinks al X used to offer the Guru Activist In-
Amundi Asset Management’s report members of SharkWatch50 from 2010 faster had it not been for the distraction dex ETF, but it was liquidated last year
reviewed relevant studies and came to to August 2016, the average sharehold- of activist investors. But according to due to a lack of interest and growth
the conclusion that activism creates er returns for targeted companies only Peltz’s statement when he divested from prospects. E

What is in a shareholder activist’s toolbox?


A strategy often used by activist investors companies feel that it is not ‘nice’ to to support their measures.
is shareholder engagement with the expose issues publicly. But in the end, we There is also the vote “no” campaigns
company. Singapore-based activist funds feel that once a company goes public, it has that urge shareholders to vote against
Quarz Capital Asia and Judah Value Activist to answer to the public and this includes executive pay or candidates for the
Fund use this approach as do many dealing and responding to critiques from director seat. According to an analysis
institutional investors. shareholders,” he adds. by PwC, even if the vote fails, the
“The majority of our activism activities Quarz has launched campaigns on campaign sends a strong signal of shifting
are subtle and behind the scenes, where Singapore-listed International Healthway shareholder priorities.
we work with existing management Corp, at which it replaced three board For instance, last year, the State Street
teams to increase shareholder value. We members and saw the company sold with Global Advisors used this strategy to
apply a private equity philosophy to the 100% profit to OUE Investments, owned highlight gender diversity and announce
listed space,” says Roland Jude Thng, who by the Riady family in Indonesia. It has also its intention to vote against nominations
manages the Judah Value Activist Fund. written an open letter to New York-listed in companies that did not have women
A recent campaign of the fund targeted LendingClub Corp, in which it made three directors. According to reports, it had voted
Hong Kong-listed coal miner Agritrade recommendations to increase shareholder against 400 companies as at July last year,
Resources Ltd, which fuelled the fund’s value in view of the online lending 42 of which have committed to change.
return of 103% in seven months this year, marketplace operator’s dismal profits. Sometimes, the campaigns end in
Moermann: When we see that there
according to Bloomberg. The fund has also Other commonly used tools are proxy fights when the target companies
is some opposition, we use a public
taken a stake in Singapore-listed Ramba the threat of exit by large institutional are defensive. Proxy fights are when a
campaign to open the discussion on
Energy Ltd to turn around its logistics and shareholders, voicing their displeasure group of shareholders join forces to gather
our proposals to a wider public
energy businesses. publicly, proposing shareholder resolutions enough shareholder proxies to win a vote.
Jan F Moermann, chief investment the pulse of the company. “When we see or initiating takeovers, according to According to Investopedia, this is mainly
officer at Quarz Capital Asia (Singapore) that there is some opposition, we use a a discussion paper by Amundi Asset used in takeovers where the existing
Pte Ltd, says it usually starts with public campaign to open the discussion Management. Oftentimes, activist management is voted out. At the other end
behind-the-scenes negotiations to feel on our proposals to a wider public. Many investors reach out to other shareholders of proxy fights are settlements.