Why this property giant’s shareholders staged a strategy coup

The complete corporate overhaul that Lendlease announced on Monday is something you don’t see every day. But even rarer is the total and unbridled capitulation by the board and management to a well-armed group of shareholders – you could even call it red-letter day for shareholder democracy.

The hulking-out of Lendlease shareholders not only demonstrates just how aggrieved they were, but it is a reminder that investors are the owners and in theory the board works for them.

Render of the $1.2 billion Victoria Cross Station tower at North Sydney being developed by Lendlease.

Based on last week’s closing price, Lendlease shares were down 25 per cent over the past year, 55 per cent over five years and 34 per cent over 20 years.

But the sometimes outspoken and critical Lendlease shareholders didn’t get mentioned in the credits on Monday. No board wants to admit it was taking strategy-changing, and even company-changing decisions, with a gun held to its head by shareholders.

The nub of the new strategy is to sell out the bulk of its offshore businesses and focus on its more profitable Australian operations. The $4.5 billion raised from this exercise will also pay down some debt and get distributed to shareholders.

You could call the strategy “shrinking its way to better profits”.

Indeed, the company announced that some of the decisions (which were part of Monday’s announcement) were already in train. While that is undoubtedly true, the scale and speed of the shape-changing strategy undoubtedly goes way further than the company had been planning before feeling the heat from disaffected shareholders in recent months.

While there is nothing new in large shareholders more generally exerting pressure on the companies in which they invest, it is particularly unusual that they provide a detailed blueprint for that company.

It’s even more unusual that any company follows it to the letter.

Generally, large shareholders that find fault or issues with companies will target the board and management. It is usually done behind closed doors in private meetings with the chairman or chief executive.

Shareholders also have natural leverage to push for governance changes. Each year there is an annual meeting at which they get the opportunity to vote (for or) against any directors standing for re-election and on the chief executives’ remuneration package (although the latter is not binding.)

There have been plenty of well-publicised examples in which chief executives or directors have been moved on in response to agitating from shareholders.

Qantas recently had a massive refresh of its board, and its former chief executive Alan Joyce brought forward his departure after a series of mishaps/scandals and customer complaints about service.

Who could forget Rio Tinto, whose scandalous blowing-up of sacred Indigenous artworks brought down its chief executive, two other senior executives and presaged the cleaning out of most of its board?

Lendlease chief executive Tony Lombardo.Credit: Peter Rae

Notably, neither of these upheavals led to a major about-face in their strategy. Rio was being pushed to sell its iron ore division and Qantas wasn’t being pushed to sell assets.

This is where Lendlease is different.

The only comparable example in recent years has been AGL, where activist shareholder  Mike Cannon-Brookes, with support from some other investors, managed to harpoon the company’s strategy to demerge its retail and wholesale energy businesses.

In this instance, Cannon-Brookes had the company cornered because shareholders were required to vote on the deal and he had the numbers.

To be sure, Lendlease chairman Michael Ullmer announced he would retire at the end of this year after one of its largest shareholders, Aware Super, had called for him to move on.

But its chief executive, Tony Lombardo, was spared the gallows by enthusiastically supporting Lendlease. He said the strategy would leave a company that was “firmly anchored in the very best of our proud legacy, but less complex, more focused and fit for purpose”.

“By reshaping the portfolio, concentrating on our core competencies in markets where we have proven we have the right to play, and the competitive advantage to win, the financial and operational risk profile will be lower, and we believe the quality of our earnings ultimately higher and more sustainable,” he said.

What did shareholders think of Monday’s outline of Lendlease 2.0?

The share price immediately shot up to 10 per cent. You be the judge.

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