Part of the challenge is defining activism. As tens of billions of dollars flow into activist investing, a continuum of activist investment styles is developing.
Activists range from opportunistic hedge funds seeking to destabilise companies and exploit quick gains through short selling; to long-term “constructivists” who seek positive change and value creation through strategy recommendations to the board; to active investors who apply an Environment, Social and Governance (ESG) filter to their investment portfolio.
Some activists focus purely on commercial gain. Others seek to create social value by pressuring companies to adopt environmental changes, for example. The upshot for boards is a wider range of activists on share registers with competing interests.
“The challenge for boards is to weigh up the different interests of activists,” says Beatty. “Boards will need to identify activists who seek short-term ‘slash and burn’ gains and consider their interests against the needs of long-term shareholders. There is not a one-size-fits-all model for activism; assessing their proposals requires a lot of board judgement.”
Boards that ignore activism do so at their peril, says Beatty. “This is not a trend that will happen or something where boards can hold their breath and hope the wave passes. Activism is sweeping through public markets in America and Europe and spreading to others. It’s rapidly gaining support from the world’s largest investment funds.”
The Governance Leadership Centre asked Beatty about activism and its implications for Australian boards. Here is an edited extract of that interview:
Governance Leadership Centre: David, activism has been around for a long time. What’s changed to make it such a key governance issues for listed companies?
David Beatty: In the ’80s and ’90s, activist investors were thought of as corporate raiders and generally had a bad name. They would bang on doors to force change, often acted alone and controlled only a tiny percentage of stock. Today, the activist fund that has 1 per cent of the share register might have mobilised support from funds that control 40 per cent of the stock.
The world’s largest institutional investors, such as BlackRock and Vanguard, have directly supported activist campaigns, where they are seen to create value. Activists have never had as much support from institutions as they do today.
Tony Featherstone is the Consulting Editor of the AICD Governance Leadership Centre. He speaks with leading governance research David Beatty on how boards are turning activists into allies. For more go to http://bit.ly/2qRSidi