Elliott Lawyer Warns Korea Better Brace for Activist Funds
" Bloomberg (08/15/18) Kim, Sohee"
The lawyer who represented Paul Singer’s Elliott Management in a proxy battle against Samsung Group is seeing a surge of interest from activist investors in South Korea’s businesses. Inquiries to his law firm about shareholder activism have tripled, said Choi Young-ik, founding manager at Nexus Law Group. The trend comes as President Moon Jae-in seeks to push the country’s powerful family-owned conglomerates, known as chaebol, to improve corporate governance and boost investor returns. Hedge funds, mostly from the U.S. or U.K., aim to boost their returns from shareholder activism by 15% to 40% in South Korea, Choi said. Activists have had little success in the country in the past, but that began to change after the Samsung merger, observers say. After engaging Samsung Electronics Co. for more than a decade, Singer’s campaign in 2016 succeeded in pushing the tech giant to increase stock buybacks and dividends. Most recently, Hyundai Motor Group terminated a $8.8 billion deal under pressure from Elliott, marking an unprecedented victory for shareholder activists in South Korea. Choi, who has advised Elliott Management since 2001, said the number of foreign hedge funds who eventually launch a proxy fight against Korean companies is still small because of a lack of local protections of minority shareholders. Choi is now leading the country’s first activist campaign by a local hedge fund against a foreign fund in Korea. Seoul-based Platform Partners Asset Management is mimicking Elliott’s campaign strategy to get Macquarie Korea Infrastructure Fund to lower management fees and boost returns to shareholders.
Opinion: Companies Shouldn't Be Accountable Only to Shareholders
" Wall Street Journal (08/14/18) Warren, Elizabeth"
In the early 1980s, large American companies steered less than half their earnings to shareholders, spending the rest on their employees and other priorities. But between 2007 and 2016, they dedicated 93% of their earnings to shareholders. For much of U.S. history, corporations sought to succeed in the marketplace while recognizing their obligations to employees, customers, and the community, writes Sen. Elizabeth Warren (D-Mass.). These days, wages are no longer rising along with corporate profits partly because of a new theory that emerged in the late 20th century—that corporate directors had only one obligation: to maximize shareholder returns. The Accountable Capitalism Act would look out for American interests by requiring large companies to obtain a federal corporate charter mandating that corporate directors consider the interests of all major corporate stakeholders—not only shareholders—in company decisions. Employees would elect at least 40% of directors. Shareholders could sue if they believed directors weren't fulfilling those obligations. This approach is similar to the "benefit corporation" model, which gives businesses fiduciary responsibilities beyond their shareholders, according to Warren.
Opinion: Boardroom Roles Must Be Understood, Not Blurred by Regulators
" Australian Financial Review (08/15/18) Proust, Elizabeth"
Elizabeth Proust, chairman of the Australian Institute of Company Directors, says in this opinion piece that the role of non-executive directors increasingly is misunderstood. "Recent discussions among policymakers and commentators reveal an emerging view that non-executive directors should be so intimately involved in day-to-day operations that they are able to ensure that nothing ever goes wrong. Such a view is not only unrealistic given the size and complexity of many modern companies, but also fundamentally misunderstands the role of non-executive directors, the duties they have under law, and their place in our corporate governance framework," she writes. "While it would be nice to think that we could regulate our way to a world where no employee of any company ever acted unethically, the truth is corporate governance is too complex a matter for all factors and eventualities to be foreseen and proscribed by regulation...Non-executive directors in businesses of all types should reflect on the learnings from and recommendations that will emerge from the current royal commission. Directors and management need to take accountability for misconduct in their organizations and be transparent about their actions in response. Importantly, however, regulators must enforce the laws already available to them. And before legislators rush to legislate, they need to understand the underlying strengths of the corporate governance system we already have."
Developments in Governance and Disclosure: Three-Year Shareholder Proposal Trends
" Lexology (08/13/18) Kimball, Robert L.; Fortt, Sarah E."
ISS data reveals that the percentage of shareholder proposals pertaining to more traditional governance matters was nearly equal to the percentage of shareholder proposals pertaining to environmental or social matters over the last two years, but there was a significant decrease in governance proposals and a corresponding increase in environmental and shareholder proposals between 2016 and 2017 meetings. For 2018, about 40% of shareholder proposals reported to ISS related to governance matters, down from 42% in 2017, while 41% pertained to social or environmental matters, up from 40%. In 2016 meetings, about 50% of shareholder proposals related to governance matters, and 30% related to environmental or social matters. Shareholder proposals receiving majority support during the last three years include 10 proposals requesting a report on governance proposals implemented to monitor and manage financial and reputational risks related to the U.S. opioid crisis, seven proposals related to drug prices, six proposals requesting a report on "truthful" news operations, three proposals related to cybersecurity and cybersecurity risk matters, and two proposals requesting reports on gun violence or safety.
Canada: Exploring the Link between Gender, Governance, and Shareholder Activism
" Mondaq (08/13/18) Shung, Kaitlin"
Companies with more women on their boards attract fewer activist investors, according to a study by global consultancy firm Alvarez and Marsal (A&M). In addition, companies not engaged by activists had on average 13.4% more women on their boards. The study shows that the push for diverse governance only seems to be getting stronger globally. In Canada, all CBCA companies with publicly traded securities must now disclose how many women and visible minorities are on their boards. In addition, proxy advisors Institutional Shareholders Services and Glass Lewis have pledged to withhold vote recommendations if a company does not have female board members or if it has not adopted a formal written gender diversity policy. The study highlights an important correlation between women and shareholder activism, and the relationship appears to lie in company performance. Harlan Zimmerman, a senior partner at Cevian Capital, explained that "boards with a greater percentage of women are not only likely to be more diverse in their thinking, but, by definition, they are less likely to function like an old boys' club" and that "both of these should contribute to, on average, better performance." Furthermore, diversity of experience and thought also leads to better risk management and more innovation. With all of these benefits becoming increasingly apparent, if a board has no women on it, it is easier for activists to depict a company as out of touch and use that as an opportunity to advance their platforms.
Activists Are Rebranding as a ‘Force for Good’
" IR Magazine (08/14/18) Richardson, Ben"
Activist investors have started presenting themselves as “change agents” that help companies unlock value and drive growth, especially in Asia. They have also become more sophisticated communicators, using traditional and digital media to launch campaigns, lobby shareholders, and address journalists directly. This shift in positioning as a “force for good” has been assisted by policy changes in some of Asia's key markets. Most notable is Japan, where Prime Minister Shinzo Abe is driving corporate governance reforms and strengthening the protection of minority shareholders. Other markets—including Hong Kong, South Korea, Singapore, and China—are following suit, and opportunities for shareholder activists are expected to multiply across Asia. According to JP Morgan, there were 106 activist campaigns in Asia last year, up from just 10 in 2011. In this new environment, many management teams in Asia are now more willing to engage with activists. And while it does not mean that companies will immediately agree to activists' requests, it does mean that companies are having to be much clearer about explaining their strategies to all stakeholders. It is important for companies to prepare for any issues early, know their audience, and clearly communicate the company's long-term vision. An activist investor's biggest weapon is being a “champion of change,” and many dissatisfied investors will often choose “change for the sake of change.” Companies must actively define their strategic and financial goals and provide a clear path to realizing them—otherwise, activist investors will be only too happy to point the management in the right direction.
Meet the Hedge Fund That Is Making Life Hell for CEOs
" Crain's Chicago Business (08/10/18) Pletz, John"
Engine Capital, a small New York-based hedge fund, recently forced changes at Navigant Consulting (NCI) and InnerWorkings (INWK) by threatening public proxy fights. On July 29, InnerWorkings agreed to add two independent board members and hire a consulting firm to identify cost-cutting strategies. In May, Navigant said it would increase its share-buyback program by $175 million and allow the hedge fund to address the board about executive compensation and performance goals. "We are at record levels of activism," says Kai Liekefett, a New York-based partner at Sidley Austin and chairman of the law firm's shareholder activism practice who has represented both Navigant and InnerWorkings. Liekefett says there have been more than 90 proxy fights already this year, up from 79 in all of 2017. Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware, says, "Small companies flew under the radar before." Engine Capital was founded five years ago by Arnaud Ajdler and first emerged in late 2013 when it threatened a proxy fight at LSB Industries (LXU). It has about 50 investments, valued at about $190 million, according to Nasdaq, with stakes in Navigant and InnerWorkings of 4.4% and less than 2%, respectively. "Proxy fights are the new normal," says Liekefett. "In the good old days, if a company's board didn't do what you wanted, you voted with your feet by selling your shares. Now you launch a proxy fight."
Take ESG Ratings With a Grain of Salt
" Financial Advisor (08/07/18) Funk, Karina; Dwyer, Emily"
Research firms that focus on environmental, social, and governance (ESG) matters provide helpful information to investment firms. However, investors should not rely solely on the ratings developed from their research to make investment decisions, according to Karina Funk, portfolio manager and head of sustainable investing at Brown Advisory, and Emily Dwyer, research analyst at Brown Advisory. Investors need to engage in diligent, primary research in order to uncover key information on ESG matters. One problem facing ESG ratings is the different factors that the various ratings systems prioritize when defining a "good" company, which means that the offerings can deliver wildly different results. A Brown Advisory analysis last year comparing six leading ESG ratings systems revealed that a typical company might receive a top-quartile rating from one ratings system, and a bottom-quartile rating from another. Investors should ask what they can learn from each ratings system. Rather than view ESG grades as an endpoint, investors should approach ratings as a resource that can help spark questions and lead to further digging for information, according to Funk and Dwyer.
Toll of Scuppered Deals This Year Hits $540 Billion
" Financial Times (08/12/18) Platt, Eric; Fontanella-Khan, James"
So far this year, acquisitions worth more than $540 billion have been derailed in part due to increased government scrutiny. Increasingly, companies are using foreign investment laws to block deals in the technology and utilities industries, among others, and antitrust regulators have put the brakes on several multibillion-dollar transactions. These deals include Broadcom's (AVGO) $142 billion hostile bid for rival Qualcomm (QCOM), which was blocked by U.S. President Donald Trump on national security grounds, and Qualcomm's $44 billion pursuit of Netherlands-based NXP Semiconductors (NXPI), which China refused to approve amid an escalating trade dispute with Trump. Other deals that were unsuccessful include the $3.9 billion merger of local broadcast operators Tribune (TRCO) and Sinclair (SBGI) and U.S. grocer Albertsons' (ABS) $5.6 billion takeover of drugstore chain Rite Aid (RAD). In addition to regulatory scrutiny, advisers say shareholder activism has added a significant amount of uncertainty to pending transactions. "You used to sign up a deal and, absent a topping bid, shareholder approval was largely on autopilot," said Daniel Wolf, M&A partner at Kirkland & Ellis. "Now, the possibility of deal-related activism, on the buyer or the target, has become part of the discussion."
Is It Time to Regulate Proxy Advisory Firms?
" Cooley PubCo (08/08/18) Posner, Cydney"
The debate over regulating proxy advisory firms is once again gathering steam. According to "The Big Thumb on the Scale: An Overview of the Proxy Advisory Industry" from Stanford's Rock Center for Corporate Governance, although proxy advisory firms influence institutional voting decisions and corporate governance choices to a significant extent, it “is not clear that the recommendations of these firms are correct and generally lead to better outcomes for companies and their shareholders.” The paper thus suggests that some type of regulation of proxy advisory firms might be necessary to increase their transparency and improve the reliability of their recommendations. Specifically, it recommends regulation that could include the following requirements: maintain adequate resources, improve the reliability of recommendations, require reliability testing, provide past recommendation data for third-party evaluation, increase transparency about model and guideline development, develop reliable mechanisms for incorporating market feedback on models and guidelines, disclose commercial relationships with issuers, and impose an explicit fiduciary-duty standard. In addition, the paper suggests eliminating the requirement that institutional holders vote on all proxy items, which, the authors suggest, would enable investors to decide whether or not to buy recommendations from proxy advisors.
Meet the Tesla Board Being Tested Like Never Before by Musk
" Bloomberg (08/09/18) Greenfield, Rebecca"
The independence and competence of the board of Tesla (TSLA) will be tested like never before following Chairman Elon Musk's recent tweet that he might take the electric-car maker private. The board has faced pressure this year as Tesla burned through billions in cash and struggled to meet certain production goals. A shareholder pushed for the election of an independent chairman, and CtW Investment Group waged a battle against the reelection of three directors who were up for vote. Several of Tesla's directors have close business or personal ties to the chairman and CEO. Antonio Gracias, founder of Valor Equity Partners, serves as lead independent director, and Brad Buss, former SolarCity chief financial officer, is another director that the electric-car maker deems to be independent, but they are not classified as independent by proxy advisory firms Institutional Shareholder Services and Glass Lewis. Kimbal Musk, a food entrepreneur and Elon's brother, is another director. "Having a strong independent board is extremely important for us and the funds we work with to ensure that this has been looked at through independent eyes," said Dieter Waizenegger, the executive director of CtW.
Beards Are Back. That's Bad News for Gillette
" WFMZ-TV 69 (PA) (08/08/2018) Meyersohn, Nathaniel"
Procter & Gamble's (PG) acquisition of Gillette in 2005, the largest transaction in history at that time, has not always panned out as P&G hoped. Warren Buffett, Gillette's largest shareholder then, called the $57 billion purchase a "dream deal." Although the market has rebounded, Gillette continues to struggle due to a slowdown in shaving. American men are not shaving with old-fashioned razors like they used to. Investor Nelson Peltz, who won a seat on P&G's board after a lengthy proxy fight, criticized executives for not mounting a more effective response to cheaper, direct-to-consumer online subscription shaving clubs. The company decided to cut prices by an average of 12% on its shaving products last year, and also expanded cheaper choices. The moves helped Gillette regain share and reverse sales declines. In addition, the relaunch of Gillette on Demand, a digital subscription platform that includes text-to-order and free shipping, has given the company a new tool to acquire customers online and fight off the direct-to-consumer online subscription shaving clubs.
For Icahn, Amazon Is a Reason Not to Do a Deal
" New York Times (08/08/18) de la Merced, Michael J."
In opposing Cigna's (CI) proposed acquisition of Express Scripts (ESRX), investor Carl Icahn cites the threat of competition from Amazon (AMZN). In a public letter to shareholders of Cigna, in which Icahn owns a stake of undisclosed size, he said, "Purchasing Express Scripts may well become one of the worst blunders in corporate history, ranking up there with the Time Warner/AOL fiasco and General Electric's (GE) long-running string of value destruction." In addition to criticizing the price Cigna is paying and questioning whether the White House's desire to lower drug prices could put a damper on Express Scripts' profitability, he argued that Amazon's acquisition of online pharmacy PillPack puts the company in competition with Express Scripts' own mail-order pharmacy business. Icahn wrote, "With their 100 million prime members, Amazon has become one of the toughest competitors in history (feel free to ask the retail industry). While their ultimate health care plans are not revealed yet, it is almost certain the first step of a much larger play in the pharma distribution space. Make no mistake, Express Scripts is no Apple (AAPL) and breaking into the PBM ecosystem is not that difficult for a company that already has the systems, the network, and the scale that Amazon does. Knowing this, it is absurd for Cigna to now walk into the minefield that Express Scripts might well become."
Asia Embraces Dual-Class Shares, and Investor Activists Smolder
" Bloomberg (08/07/18) Robertson, Benjamin; Tan, Andrea"
Shareholder advocates in Asia have lost out in the race for technology listings. Hong Kong and Singapore’s stock exchanges this year permitted companies to list shares with different voting rights, despite concerns that dual-class shares would harm the long-term integrity of markets by elevating corporate founders’ rights over other investors. Corporate governance watchers warn that outsize voting rights make it impossible to oust senior management or enforce discipline. Meanwhile, the growing value of tech companies highlights why there is no turning back for Asian exchanges. For example, Chinese smartphone maker Xiaomi Corp. raised $5.4 billion in an initial public offering in Hong Kong in July, shortly after the new rules took effect. It is now one of the most actively traded stocks on the exchange and its second-largest tech company by market value. "It looks like dual-class shares are here for now," said David Smith, Asia head of corporate governance at Aberdeen Standard Investments. "We need to be careful, though, that investor protection is balanced with this commercial desire to attract listings."
Miners Spend on Shareholders, Not Projects
" Wall Street Journal (08/07/18) Hoyle, Rhiannon; Patterson, Scott"
The globe's biggest mining companies are spending big on shareholders via dividends and share buybacks, following through on a pledge to increase payouts as they come out of a market slump. Executives have been forced to defend the payouts though, amid worries that they are sacrificing opportunities for growth, like making deals or building mines. Iron-ore giant Vale SA (VALE) reported a jump in first-half underlying earnings and said it would give shareholders $2.1 billion in dividends and buy back shares worth $1 billion. Vale, which recorded second-quarter capital expenditures at the lowest level in 13 years, said buying shares "is one of the best investments for its excess cash." In 2017, BHP (BBL), Rio Tinto, Glencore, Vale, and Anglo American PLC gave investors dividends worth over 50% more than the prior year, according to S&P Global Ratings.
Opinion: Time to Forget Japanese Myth of Good and Bad Shareholders
" Nikkei Asian Review (08/07/18) Givens, Stephen"
Investors who recently submitted proposals at Japanese companies for anything from adding outside director to reducing cross-shareholdings found themselves fighting off accusations of being "bad" shareholders. Companies accused them of being motivated solely by greed and short-term profit. Orix Senior Chairman Yoshihiko Miyauchi, among others, dismissed shareholder activism as a "shortsighted money game." Reporters joined company management in cross-examining shareholders about their "long-term intentions," writes Stephen Givens, a professor in the Law Faculty of Sophia University. In the mid-2000s, the government, courts, and corporate establishment similarly bandied about the idea of "good" and "bad" shareholders when the first wave of shareholder activism reached Japanese shores. The "good" shareholder, or the investor who resists the temptation to sell their shares when a company is in trouble, is self-serving propaganda designed to justify the web of cross-shareholdings. Investors who sell their shares are said to be "bad" because they strip a company of capital, which is not true. The fable of "good" and "bad" shareholders should be put to bed, and the merits and disadvantages of cross-shareholdings deserves a rigorous debate, according to Givens.
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