US activists have inspired global shareholders to push for their rights on issues such as governance and executive pay, with specialist service providers often finding a new role in confrontations
A little over 220 years ago the US Revolutionary War was said to have inspired the French – who fought alongside their American friends – to take up arms against their ruling class and demand more representation. Skip forward to the 21st century and we find Americans are once again inspiring revolution in Europe. This time it is US shareholders and their culture of adversarial confrontation and activism that are inspiring European investors to push for a stronger voice.
Investor activism was virtually non-existent in continental Europe prior to 2005. Even at UK firms – where shareholder activism is more pronounced – the ground has shifted dramatically in the past four or five years. What is driving this sudden acceleration toward aggressive activism at European companies and elsewhere?
Perhaps the two most compelling influences on this new activist world are the shifting regulatory environment and the presence of US investment managers in overseas markets. This growing trend of activism in markets that were traditionally devoid of shareholder democracy should be of concern to North American managers and board members. This year is widely predicted to be the most active in history for US companies, and many are already starting to feel overwhelmed. But they need to cast an eye over events in the UK, Europe, Australia, Japan and other countries where they may have a presence.
When trying to understand shareholder activism in Europe, you first need to consider the different varieties, explains John Wilcox, chairman of international consultants Sodali. ‘There are three different types of activism: the first is short term or opportunistic, which is the kind of thing hedge funds are usually involved in,’ he explains. ‘This is the type of thing companies are always wringing their hands about, where an investor comes in and takes advantage of a situation, trying to capitalize or put a company in play. The goal here is to use activism as a way to make money quickly. Then there is the long-term, strategic activism conducted by the likes of Pershing Square Capital Management and Knight Vinke, where the activists take long positions in companies they think are undervalued or poorly governed but where they believe they can unlock value in the long term.
‘The third type is the activism focused on corporate governance issues and shareholder rights or structural reforms. Groups behind this form of activism take their responsibilities as owners seriously; they are trying to increase accountability and eliminate structures that create inefficiencies, or bad practices or policies. The US is where this happens most because we have rule 14A-8 and our system is designed to promote shareholders being activist around issues.’
Standard bearers
Activism related to governance issues is proving to be the most popular form in continental Europe. For example, according to a study conducted by the European Corporate Governance Institute, 76 percent of all shareholder proposals filed in mainland Europe since 2005 are related to governance structures.
Understanding the type of activism you are facing and the motives of investors is extremely important when preparing a response and planning a strategy, because the response has to focus on the nature of the problem. ‘Shareholder activism – although I prefer to call it engagement – is definitely on the rise in Europe and on a global basis,’ says Jean-Nicolas Caprasse, head of European governance at RiskMetrics.
He believes there are a number of drivers behind growing engagement, including EU-level and national regulation and voluntary coalitions. ‘I think the issues in Europe have created an environment where activist investment around issues works,’ he says. ‘The first driver worth mentioning is the UN’s Principles for Responsible Investments (PRI). Essentially this is an organization of 660 institutional investors throughout the world – with a large contingent from Europe – that is calling for investors to take all the environmental, social and governance issues into the investment decision-making process, and to engage in a dialog with the companies in which they invest.’
Caprasse believes this is a strong motivator for engagement and communication. He also feels institutions in the PRI hold themselves to a higher fiduciary standard.
With all this rampant engagement, what are investors most interested in right now? Caprasse explains that, as in the US, ‘executive compensation is receiving a great deal of attention.’ This is a very hot topic, partly because of the failure of the markets and the obvious disconnect between pay and performance, but also because – outside of the UK – this is a very new phenomenon: prior to 2005 very few European countries had compensation disclosure rules.
Similarly to the US, Eurozone governments are working on legislation restricting executive compensation, and in some cases director pay as well. In Sweden, for example, the government has announced a policy opposing any form of variable pay.
‘This is an extreme view,’ observes Wilcox. ‘Sodali carried out a survey of major US institutions that invest in Sweden asking whether they agreed with that policy and the answer was a resounding ‘no’. ‘Variable pay in principle is supported but one of Sweden’s banks announced that it is going to suspend variable pay for 2009, so we see companies in some markets stepping forward to deal with the issues and not waiting around for investors or activists to start attacking them.
‘A number of companies in Switzerland, including Nestlé, have adopted an advisory vote on compensation. There is a best practice initiative from the Swiss government recommending that.’
Specialist services
One indication of the rise in activism is the growing number of speciality firms serving it. One new company, reminiscent of the early days of ISS, is IVOX, a Germany-based firm founded by Paul Ballington, Alexander Juschus and Mike Danbury, which provides corporate governance analysis and ratings. In 2009 the company published its rankings for the 30 companies listed on DAX, and it claims to use more than 100 criteria in assessing its rankings. Volkswagen achieved the lowest score while Adidas and Lufthansa were among the best.
Apart from the growing number of European activists and proxy advisory services like PIRC, NBIM, Manifest, Proxinvest and Vereingung Institutionelle Privatanleger, there are also several US companies active in this area. Blackrock, one of the largest investment managers in the US, has significant holdings in Europe – Blackrock’s German holdings (left) shows the extent of its ownership. The figures make for interesting reading when you bear in mind that, under German law, an investor needs only 5 percent to call an extraordinary meeting and force other corporate changes.
The presence of Blackrock is important because it has a reputation for supporting management in proxy fights. Abe Friedman, global head of corporate governance at Blackrock, explains that the investment house always votes its shares. In fact, he suggests that it votes 100 percent of all shares it is eligible to vote. It also employs 12 people to conduct research and determine how to vote, rather than using a proxy advisory service. Speaking to Blackrock and understanding its position is, therefore, an important step.
As we move into proxy season both in the US and Europe, Caprasse expects the US influence to recede. ‘US activists have been less visible in Europe the last two years and, as local investors become more sophisticated and gain more access through engagement, they will increasingly take over from overseas players,’ he explains.
One thing is certain, however: European investors have had a taste of activism – and they like it. They are beginning to gain significant regulatory support, and a structural shift toward less-centralized ownership will only boost their power. US and other companies with investors from the region need to monitor the mood and ensure they include these groups in outreach and engagement programs.
