Activists are at the gate and Australian boards better prepare

Australia’s executives are on notice: do a better job of listening to shareholders or brace for an activist attack.

Allan Gray Australia managing director Simon Mawhinney. Picture: David Geraghty.

Australia’s executives are well and truly on notice: do a better job of listening to your shareholders or brace yourself for an attack by ­activists.

Companies from mining giant BHP down to sandalwood grower Quintis have found themselves in recent months at the centre of well co-ordinated campaigns from ­activist investors, providing more proof if it was needed that the era in which boards could count on cosy and convivial relationships with their shareholders is over.

The situations at BHP and Quintis have introduced Australian investors to the overt forms of shareholder activism that are common in the US but which have up until now been rarely seen in Australia. Shareholder activism here has largely been confined to the shadows, with investors rarely prepared to go public with their complaints.

But the arrival of the likes of BHP agitator Elliott Management and Quintis nemesis Glaucus ­Research had long been expected, given the long record of success among such groups in the US.

Billionaires such as Elliott’s Paul Singer and famed investor Carl Icahn made much of their fortunes through taking activist positions, taking positions in stocks and then pushing for changes in strategy or management as a means of driving the share price higher. The likes of Glaucus adopt a different tack, taking a short position in their targets and then driving the stock down by publishing scathing ­research reports that often involve allegations of fraud.

Less overt are the traditional fund managers who are willing to speak up and agitate for change, such as Allan Gray Australia. It has a long record of crossing into activism, although Allan Gray managing director Simon Mawhinney told The Weekend Australian that the fund never makes an investment with a view to going down an activist path. ­Instead, ­activism is something of a plan B when a corporate strategy sours and management is unwilling or unable to recognise that.

For Mr Mawhinney, the rise in the various forms of shareholder activism in Australia is the ­inevitable result of boards continuing to pay “lip service” to ­investor ­requests.

“It’s incredibly difficult to ­engage meaningfully with boards, even when you have a significant stake in a particular company,” he said. “It forces people down the path where engaging for some of these big matters is found to be fruitless and the easiest way, ­unfortunately, is a reasonably ­activist approach to change.”

Allan Gray and Mr Mawhinney are involved in a situation with the board of an as-yet-­unnamed company that, he says, has presided over “massive value destruction” and is struggling in its efforts to encourage the appointment of some fresh eyes to the boardroom.

There is, he says, a level of arrogance that pervades many of the nation’s boards and that often makes them unwilling to listen to suggestions from their shareholders.

“People who ultimately end up on boards are reasonably accomplished in a field in their past. I think that with that comes an ­element of overconfidence and perhaps even ego,” he said.

Justin Mannolini, a former Macquarie investment banker who is now a partner in the corporate advisory team of law firm Gilbert + Tobin, says his clients are increasingly asking for advice on how to reduce the risk of being on the receiving end of an activist.

He told The Weekend Australian that the success of the US activist funds had a twofold effect. The ever-increasing funds were looking to Australia for new targets outside the crowded US market, while traditional funds — encouraged by the success of the specialist activists — were adding their own activist arms to try to capture similar returns.

“Whether it be family offices, sovereign wealth funds or institutional investors, a lot of them are beefing up their internal capacity to take a more active interest in what management is doing,” Mr Mannolini said.

While the confrontational tactics of the specialist activists have drawn controversy, with the likes of retail magnate Gerry Harvey calling for the jailing of short-­sellers who spread misinformation, Mr Mannolini believes activists are an important part of a well-functioning market.

“That disciplining effect from having activists in the investment ecosystem is absolutely critical; they’re a vital part of the sector to test management strategies,” he said. “When you hear what Elliott says, a lot of it resonates because there have been a lot of bad decisions in the resources industry and it has destroyed a lot of capital.”

The difficulty for boards and management, he says, is balancing the often short-term objectives of activists with the long-term needs of the company itself.

“It’s a bit of a fraught position for boards because ultimately they are the ones who have to live with the long-term implications of their decisions, whereas these shareholders who agitate for change have the right to sell out the next day,” he said. “That’s a particular issue for resources companies, which are inherently cyclical. Something like BHP with a broad portfolio, it’s relatively easy for an activist at any time to find a commodity or a division and say, ‘It’s underperforming and it should be divested’.”

At the smaller end of the market, Mr Mannolini notes the ­increasing capability for activism among smaller retail shareholders able to quickly and cheaply connect to one another through the internet and social media.

The input of retail investors has often been limited to the ability to ask a question at the annual meeting or vote on resolutions with shares that rarely amount to more than a rounding error. Online, like-minded retail shareholders can find each other and build a meaningful unified position.

Such a stance is causing headaches for Central Petroleum. The group recently deferred a shareholder meeting to vote on a takeover bid from Macquarie after a backlash from a coalition of retail investors brought together online.

The diverse and growing range of activist investors means it is certain other situations are not far away. “Who is next I’m not sure, but there will definitely be more,” Mr Mannolini said.