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Jun 27, 2011

American-style activism takes hold across the pond

IR magazine finds shareholders on the offensive in Europe

Elliott Advisors knows how to start a ruckus. This proxy season, the activist hedge fund attempted to instigate boardroom coups at both Actelion, the Swiss biotech giant, and National Express, a leading British bus and rail operator.

Shareholders jeered Elliott at Actelion’s annual meeting in Allschwil, Switzerland, and defeated its proposals – but that did little to allay the growing sense that a more aggressive strain of shareholder activism has taken hold in Europe.   

‘We were quite fortunate that Actelion was front-running us by a few weeks, and it appeared to be using the same playbook,’ says Stuart Morgan, head of IR for National Express. Although Elliott didn’t succeed in foisting its three nominees onto the National Express board, the company did agree to include one of Elliott’s candidates – Chris Muntwyler – as an independent non-executive director.

‘From a position of strength, we secured a mature outcome,’ adds Morgan. ‘We said, We’ve got investor support, but we don’t entirely disagree with what you’ve said. Activists can sometimes do a good job because they keep management on its toes.’

Tom Powdrill, head of communications at PIRC, a UK proxy research firm and corporate governance adviser, praised National Express ‘for giving a little ground’ in its contretemps with Elliott. ‘National Express got one nominee, with good qualifications, on the board, but it could have been facing three nominees,’ he says.

Elliott-style shake-ups were initiated more often in Europe in the last 12 months than ever before, observes Powdrill. As other examples, he cites Laxey Partners’ failed attempt to force changes at Alliance Trust and the successful bid by activist Edward Bramson, founder of US-based Sherborne Investors, to oust the CEO of F&C Asset Management and install himself and two other hand-picked candidates on the board.

A different style of activism?
Historically, there have been obstacles to waging a successful activist campaign in much of Europe. Many markets are opaque, the proxy voting system has been leaky with votes often lost, and some countries still block any shares to be voted for several days prior to the AGM, putting a damper on shareholder participation. What’s more, in some countries, controlling shareholders enjoy additional voting rights, making it harder for other investors’ positions to gain support.

Sarah Wilson, CEO and founder of Manifest, a UK-based proxy voting service, notes Bramson’s aggressive campaign against F&C was ‘very unusual’ but that similar crusades might become more commonplace in the not-too-distant future. ‘It may be that some activists have gained a taste for this [type of campaign],’ she says.

Over the past five years, US investors have become more prominent on share registers internationally, observes Wilson. ‘While [US investors] originally flexed their muscles domestically, they’re now realizing they have significant impact in non-domestic markets, too,’ she points out.

Swashbuckling American tactics represent a stark contrast to the European tradition of effecting change by engaging in a civilized dialogue behind closed doors, however. Simon Wong, partner at London-based Governance for Owners, notes that in Europe approaches to activism vary by country. Shareholder activism has been more successful in the UK, the Netherlands and the Nordic countries, he observes, and less prevalent in Italy, Greece and Spain.

That said, most activists don’t target a particular country, according to Chris Collett, head of advisory services for EMEA and IR market development at Thomson Reuters. ‘They tend to look at particular companies where there’s an opportunity for them to become involved and effect change,’ he explains.

Carrefour, a major French supermarket chain, ‘is a good illustration’ of heightened levels of shareholder activism in France, according to Carine Girard, an associate professor in the finance department of the Audencia Nantes School of Management. She attributes the rise of shareholder activism to changes in French legislation and the growing influence of professionals, such as hedge funds and Proxinvest, RiskMetrics/Deminor, and other proxy-voting advisers.

By the rules
Earlier this year, two activist investors – Colony Capital and Groupe Arnault – encouraged Carrefour to sell 25 percent of its property business. Before the strategy came to a vote at an extraordinary general meeting, another activist shareholder – Knight Vinke – stepped forward, opposing the plan. ‘So then there were [activists] on both sides of the decision,’ says Girard. ‘This is very unusual.’

David Trenchard, a vice chairman at Knight Vinke, applauds Carrefour’s decision to abandon plans to spin off its property business. ‘We were concerned that the proposed spin-off was the wrong structure at the wrong time for a company that’s facing many issues,’ he explains. ‘We want to convince other stakeholders of the merits of the intellectual debate and avoid ever going to a proxy battle,’ he says.

Rule changes in some countries are also shaking up the old calculus. In the UK, for instance, ‘the Companies Act is quite shareholder-friendly,’ says Daniel Summerfield, co-head of responsible investment for the Universities Superannuation Scheme. He notes that the Companies Act allows shareholders to call extraordinary general meetings and put forth resolutions that are binding with a 50 percent majority. The result? ‘These rules focus the minds of directors and make them more accountable,’ he adds.

Finally, executive pay is a shareholder issue that has captured the popular imagination. Wong notes that in Switzerland, shareholders have voted against pay practices at banks and some very large pharmaceutical firms. At Novartis’ February annual meeting, 38 percent of shareholders voted against former CEO Daniel Vasella’s remuneration package, which included a one-time retirement payout of $12.2 mn.

Wong also cites Ethos, the Swiss foundation for sustainable development, for spearheading a number of campaigns on executive pay. This year, Ethos opposed pay reports at both Credit Suisse and UBS for having what it deemed ‘excessive’ variable remuneration.

IROs prepare for new realities
Given a climate of more confrontational activism, European IROs are scrambling to analyze their share registers – a smart practice that remains far more challenging in certain countries. In France, for instance, investors are not obliged to reveal themselves until they own a 1 percent stake.

Seeing that an activist has taken a position in your company is no reason for undue alarm, says Collett. He notes that some funds with a reputation for activism aren’t ‘activist in all their holdings’, so the best way to decipher investors’ intentions is to begin a dialogue. Collett also advises IROs to be very forthright about any problems their companies might be encountering and how they plan to address them. ‘If you ignore the elephant in the room, others are going to raise the issues for you,’ he warns. ‘And then you’ll be playing on their terms.’

Communicating often and early is what investors desire. ‘If we’re on the share register, we want to build a relationship,’ says Trenchard. ‘It should not be seen as a negative surprise when we turn up.’ Wong, too, believes a firm’s ‘receptivity to dialogue is an encouraging sign.’

In evaluating competing arguments, shareholders tend to rely heavily on management’s cues. ‘You don’t want to come across as having an emotional or defensive approach,’ explains Collett. ‘Firms need to listen to activist concerns, take them seriously and respond to them in a mature way.’

Die-hard activism
No matter how rational or forthcoming corporate executives might be, however, some activists will persist. Morgan notes that National Express had ‘a pretty good relationship’ with Elliott prior to the hedge fund’s campaign to remake the boardroom. ‘As a big shareholder, we saw it regularly throughout 2010,’ he says. ‘As an activist hedge fund, it had a range of interesting ideas, on which we engaged with it.’

Once Elliott’s strategy was apparent, National Express began consolidating support among its other investors. Knowing, for instance, that certain proxy advisers like Glass Lewis rely exclusively on public information, the company published its strategy on a section of its IR site devoted to the upcoming AGM.

National Express also began regularly meeting with proxy advisers and its top 20-30 shareholders, calling some of them several times a week. The efforts apparently paid off. ‘We got nearly unanimous support from the analyst community and investors on the idea that Elliott’s strategy was not the right one for us,’ says Morgan. He explains that after National Express prevailed at the AGM, Elliott signed an official agreement that it would ‘not agitate for 12 months.’

In the end, says Morgan, the best defense in an activist situation is to demonstrate that the company is well run, management is reasonable and IR is being practiced at a very high level. ‘If you have corporate governance best practices and a strategy known to all your investors, everything almost takes care of itself,’ he concludes. ‘It’s not rocket science.’

A who’s who of shareholder activists

‘Know your shareholder’ is the first rule for understanding and responding to investor activism, says Daniel Summerfield, co-head of responsible investment for the Universities Superannuation Scheme (USS). Generally speaking, activists fall into a few broad camps:

-Pension funds with major clout, such as Railpen Investments and USS.
USS’ approach, says Summerfield, is to have a ‘constructive, behind-the-scenes dialogue, [which] is more effective than fighting through the proxy.’

-Engagement funds, or strategy-driven investors.
This category includes Knight Vinke, Laxey Partners, Elliott Advisors and Governance for Owners, not to mention classic hedge funds. Although German politicians have dubbed hedge funds ‘locusts’, experts disagree about the extent of their power. ‘Activist hedge funds, in some cases, are very vocal, but are they as influential in bringing about change in companies as some politicians in France and Germany believe?’ asks Summerfield. ‘Their style and impact vary considerably from fund to fund.’

-Groups with a social agenda.
Associations like Deutsche Schutzvereinigung fur Wertpapierbesitz and Ethos are raising the issue of pay at public firms.

-Proxy advisory firms.
These undeniably carry clout, but Sarah Wilson, CEO and founder of Manifest, is concerned this influence might prove a distraction. ‘IROs shouldn’t worry about what Manifest, ISS or Glass Lewis thinks,’ she says. ‘They should be worried about what their shareholders think.’

Since the financial crisis, governments have sometimes pursued activist crusades, says Simon Wong, partner at Governance for Owners. In the Netherlands, for instance, parliament passed a law taxing bonuses at ING and other banks receiving state aid at 100 percent


Will shareholders develop a taste for micro-management?

It’s a given that giant companies with flagging stock prices can become activist targets. This proxy season, however, European IR professionals realized that overseas investors and proxy advisers could leave their stamp on more mundane matters, too.

Earlier this year, Hammerson asked shareholders to reduce the notice period for extraordinary general meetings from 21 days to 14 – without success. The London-based real estate company received 72 percent of the vote in favor of this motion, falling short of the 75 percent threshold for change. The loss surprised and angered the investment community because procedural changes like this are considered routine, says Tom Powdrill, head of communications at PIRC, a UK proxy research firm and corporate governance adviser.

Glass Lewis recommended a ‘no’ vote on Hammerson’s motion, prompting many to complain of proxy advisers’ power. Some also blamed overseas shareholders like the Ontario Teachers’ Pension Plan – which possesses a nearly 12 percent stake and also owns Glass Lewis – for meddling.

Morgan Bone, corporate communications director at Hammerson, is philosophical about the defeat. ‘[The shorter notice period] gives the company greater flexibility but, ultimately, a significant number of shareholders decided they did not want it,’ he says. ‘We’re happy to accept that position.’

This article appeared in the July print edition of IR magazine.