Some people invest in a company because they trust the leadership to deliver shareholder value, due to track record and board composition. Some people invest in company because they like the product or service proposition, the basic business model. Activists invest for the latter and certainly not the former. Activists have faith in the underlying business but not the leadership, in fact an activist typically wants to replace the CEO, an impediment to releasing higher return for investors.
The activist takes a position from which to lobby other shareholders and their influencers, he is an agent of change and a disruptor, so to the board he is always an unwelcome intrusion. The activist takes on a significant challenge which, if successful, will bring substantial reward that is why he has a higher appetite for risk than the incumbent board and why he is invariably an aggressive hedge fund.
The first challenge he faces is to convince fellow shareholders that their trust in the incumbent board is misplaced and the business, having exhibited sluggish growth in a buoyant sector, is overdue for a new leader. In short it is time to call time on the CEO. If he manages to convince some shareholders of his defenestration strategy, there will be others who baulk at such drastic action.
The second challenge he faces is to convince fellow shareholders that he has a viable alternative to the existing CEO, a replacement who will adopt a new strategy to release value trapped within the business. Nervous fellow shareholders will be wary that to endorse the candidacy of the activists man could be simply of jumping from the frying pan into the fire, and may not result in anything more than unnecessary upheaval. The status quo is a powerful advocate of inertia.
The third challenge he faces is to win a confidence vote at the AGM, by a significant majority ie over 50% and the size of some individual shareholdings might make this almost impossible. The activist will also aim to win over proxy voting agencies to his proposal, but not all agencies will be open to change. For example pension funds tend be quite conservative and see any external pressure to impose new leadership as a risk to their long term investment strategy.
The fourth challenge for an activist is to be patient as even a lost motion a an AGM can sow the seeds of discontent which come to fruition months or years later. Look at Premier Foods from July 2018 to date. At the AGM on 18 July 2018 the Hong Kong based activist and minority shareholder (10%) Oasis called a vote of no confidence in the CEO with a proposal to replace him with the Finance Director and a new strategy of asset disposal to release value.
The incumbent board presented the activist as an asset stripper.‘If these activist investors succeed in removing him they risk destroying significant value, rather than creating it’said former head of Waitrose Mark Price. The motion duly failed by 59%-41% votes, but having achieved support from well over a third of all shareholders, the proposal had achieved consideration. This despite the Chair rallying support for his CEO from the largest shareholder, Japanese Nissin Foods (20%).
In November 2018 the CEO surprised the market by announcing he would step down in three months so a successor could be found to pursue a new strategy. This appears to be by ‘mutual agreement’ but no doubt the confidence vote had some bearing. Two months later the UK activist Paulson increased its share from 7% to just under 12% suggesting that the CEO departure was a positive move, and there was indeed latent value in the business awaiting release. This seems to vindicate the Oasis AGM motion last July, despite it failing to succeed at the time. Activists are truly agents of change, welcome or not, they make an impact even if it is just not always immediate.
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