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COVER STORY
SEPTEMBER 10
2018
THE IMPACT OF
SHAREHOLDER
ACTIVISM
S
B Y TA N Z H A I Y U N
Primary geographies for activism activity in Asia (2011-2017)
hareholder activism has been on the
rise in Asia since the 2008 global finan-
cial crisis, due in part to the greater
push for good corporate governance
and the protection of minority share-
holders. This tide of activism brings 92 / 24%
with it various implications for investors, rang- 24 / 6%
47 / 13%
ing from share price movements to corporate
governance reforms. I think
Last year,four of the 10 most targeted countries you will start to
(excluding the US) by activist investors were in see more 87 / 23%
this region, where campaign volume has seen activism 38 / 10% Total # of campaigns = 376
a compound annual growth rate of 48% since whenever there
2011, according to a JP Morgan report in May. # of activist campaign /
is dilemma for % of total Asian activity13
According to the report,activist assets managed management
by hedge funds reached a record US$125.6 billion that stalls Activism activity
in December last year, up 4% from 2016.Also, the 64 / 17%
corporate
number of international campaigns exceeded
those in the US for the first time. decision- Lower Higher
“Broadly speaking, activism has been on the making.
JPMORGAN
rise since the global financial crisis as part of the > Black
circular change on how the wider investment
world views its role in managing companies. Financial Services Pte Ltd. Activist hedge funds usually acquire a signif-
There has been a view that the board may man- “These activities will only increase in the fu- icant amount of shares in a company that they
age the company,but shareholders have a greater ture due to the evolution of financial markets.The think is undervalued.After acquiring the equity,
role to play in overseeing the board,” says Josh US and European markets serve as a precedence they launch campaigns to force the company
Black, editor-in-chief of Activist Insight, a publi- to what will happen in Asia.” to adhere to their suggestions. Meanwhile, in-
cation based in New York and London. The Judah Value Activist Fund invests in the stitutional investors could partner hedge funds
More activism campaigns could occur going Hong Kong and Singapore markets. It currently or announce their intent to vote a certain way.
forward due to the strong economic growth, he has US$44 million under management and tar- According to Moermann,activist campaigns
adds.“This creates more opportunities for activ- gets annual returns of 20% to 30%. will always be present as long as there are com-
ists to say they should do this or that, or point Activism can be defined as any type of investor panies that are being run inefficiently. Quarz
out underperforming companies that still have influence on a company’s decisions, including invests in companies around the world and in-
cash and can return it to shareholders, invest it institutional investors that recommend the other cludes the likes of Apple and Switzerland-based
or become a takeover target. There are far more shareholders vote a certain way. However, some Coltene Holding in its portfolio.
options when companies are doing well, and I associate this more commonly with hedge-fund “Activists are just shareholders who are willing
think you will start to see more activism when- activism,where the funds acquire shares of the to speak up and improve shareholder value.Many
ever there is dilemma for management that stalls target company and issue various demands — at small shareholders invest their hard-earned re-
corporate decision-making.” times using aggressive or controversial methods tirement funds in companies that languish for a
According to the Activist Insight Half-Year — to increase shareholder value. long time and do not increase dividends or grow
Review 2018, most of the global activism centred A recent example in Malaysia was the Minor- their share price,” says Moermann.
on dual-class share structures, mergers and ac- ity Shareholders Watch Group’s vote against the “We help investors by stepping up to the task,
quisitions (M&A) and gender diversity, along re-election of two independent directors of Sapu- raising our concerns and making recommenda-
with a shift in attention towards environmental, ra Energy Bhd and payment of their benefits in tions to increase shareholder value.Small share-
social and governance (ESG) issues.In Asia,there July, due to excessive remuneration of the CEO. holders, in my view, should always do their own
was a rise in activism that targeted companies’ The Employees Provident Fund was reported to research before making investment decisions,
business strategies and a decline in those seek- have backed this move. but they can also follow activists to see what
ing boardroom representation. Other issues often brought up by activists are they propose.”
Foreign activist funds such as Third Point the return of excess cash to shareholders, proxy
and Elliott Management Corp are increasingly fights to place a representative on the board or GROWTH FACTORS
targeting Asian companies as the US market has M&A suggestions. There are several factors driving the growth
reached saturation point. But the bulk of share- “We do not draw a strict line here as everything of shareholder activism in Asia, including the
holder activism in Asia is still undertaken by from actively speaking to the board,shareholders demand for good corporate governance and the
domestic activists. and management to proxy fights is essentially ‘ac- protection of minority shareholders.That is why
“Shareholder activism is on the rise in Asia, tivism’.Some activists like to work behind closed most of the activity in the region occurs in de-
but mostly in South Korea and Japan due to the doors and nobody knows they are ‘activists’ while veloped markets such as Singapore, Hong Kong,
maturity of their corporate governance frame- others are more vocal about their engagements South Korea and Japan, which have introduced
works. That said, other parts of the region are and receive more media coverage,” says Jan F corporate governance and stewardship codes
also seeing an increase in such activities,” says Moermann, chief investment officer and man- in recent years.
Roland Jude Thng, who runs the Judah Value aging director of Quarz Capital Asia (Singapore) Japan’s Prime Minister Shinzo Abe has em-
Activist Fund of the Singapore-based Swiss-Asia Pte Ltd, an activist fund based in the city state. braced shareholder activism as part of his eco-
PW7
SEPTEMBER 10
2018
nomic policy.In the past,many activists avoided company private at a cheap price, which hurts
Asian markets due to their lack of transparency the small shareholders.We increase volume and View of shareholder
and weak corporate governance, according to liquidity, close information asymmetries and
various reports. But now, companies with these increase value for all shareholders.” activism is changing
weaknesses have become attractive targets. Thng made his move to activist investing
“Western investors are probably looking at in 2014, when he noticed a number of under-
countries with greater political momentum valued investment opportunities in Singapore. Most people associate shareholder activism
behind good corporate governance. In Japan, That was when he founded activist hedge fund with hedge fund activist investors such as Carl
you have the Abe reforms and in South Korea, EVA Capital SP. Icahn, who has been called a corporate raider for
you have the anti-chaebol movements.They are To Thng, the discrepancy between share his hostile takeovers; Paul Singer, whose Elliott
also probably looking for countries with a looser price and value is a signal for investors to take Management fund uses many confrontational
monetary policy,” says Black. a deeper look. “We primarily set our sights on tactics, including public letters, presentations
For instance, US-based giant activist fund companies in the small and mid-cap space with and litigation; and Dan Loeb of Third Point, who is
Elliott Management urged automotive con- strong balance sheets. My focus are small and notorious for writing harsh letters to companies.
glomerate Hyundai last year to adopt a holding mid-caps typically majority-owned by fami- Over the years, many of these prominent
company structure and implement a clearer lies,” he says. activist investors have launched nasty
shareholder returns policy. The South Korean “I would prefer to take a stake,sit on the board campaigns that last for years, fought with
company responded to this with a plan that if possible and grow the company with the ex- companies and forced executives to step down.
addressed its concerns. isting board and management team. The basis But this view of shareholder activism is changing,
According to reports,there has been a change is always undervaluation. I can choose to sit on say some reports. Many activists are switching
in culture, where retail investors are becoming the undervalued stock or sell it immediately af- strategies to be viewed more as engaged
more aware of their rights and accepting of ac- ter the shareholder value increases.” investors. Institutional investors are adopting
tivists’ call for a move away from practices such Meanwhile, there is a growing emphasis activist tactics to push for change in their
as generational succession and nepotism. on ESG principles among institutional inves- investee companies while hedge funds are taking
“In a class of Asian students,the students are tors, whose holdings are increasingly global. longer-term horizons in their investments.
always shy to ask questions.That is just the Asian Many of them are now either engaging in ac- According to a JP Morgan report in February,
culture of subtlety.But the moment a few students tivism themselves or partnering hedge funds direct public attacks on board members are
speak up,the others are more open to talk.When to push for greater ESG performance. For ex- not as common in Asia as in the US. Calls for
there are fruitful discussions among the different ample, prominent US-based hedge funds Jana corporate governance reforms and demands
participants,new ideas may be generated,which Partners and ValueAct Capital have launched for direct shareholder representation in
benefits everyone in the discussion. That is the other funds to push companies to adopt ESG the boardroom are increasing. Return on
reason I have always encouraged shareholders practices. capital, opposition to announced mergers
to speak up,” says Thng. The world’s largest asset manager,BlackRock, and acquisitions (M&A) and interested-party
“Investors should learn about their rights. waged its first campaign against Hong Kong-listed transactions are some of the common demands
After all, it is their hard-earned cash that they G-Resources Group Ltd in February 2016, voting in Asia.
used to buy stakes in companies. Their share against its plan to sell its main asset. BlackRock Many of the activists around the world are
ownership entitles them to voice out their con- stated that investors should be compensated if shifting their campaign focus to operational
cerns.Fluctuations in share prices are not a guar- a company sells most of its main assets when it issues. Rather than demanding for higher
antee and the key is to push for improvements wants to move into another industry, according dividends or M&A, they are increasingly taking
in the fundamentals. Sooner or later, the share to Bloomberg. on longer-term issues by demanding the
price will follow.” BlackRock is an example of a prominent in- appointment of independent directors, joining
Both Moermann and Thng’s funds focus on dex fund provider engaging in shareholder ac- the board or helping to execute a new strategy,
value investing, particularly among small and tivism. Index funds have an inherent inability according to a PwC report in February.
mid-cap companies that are seldom covered. to divest companies from the indices they track, According to the global firm, companies
The presence of undervalued companies and the thus they are incentivised to increase monitor- that often become targets of activists have low
dearth of information present an opportunity ing to improve performance. market value relative to their book value, weak
for activist funds. “With index funds,it is more about the votes. company performance compared with their
“Especially in Singapore and Hong Kong, They are doing it to win the votes of the top inves- peers, but are profitable with good operating
activists find undervalued, high-quality com- tors.Activists are working closely with pension cash flow, return on assets and excessive cash in
panies compared with those in the US and the funds,just like Jana and the California teachers’ hand. Companies with diverse businesses with
European Union. We only invest and get active pension fund. They ran a campaign on Apple one line that is underperforming or a line that has
if the companies are very undervalued and in- in January for more parental controls on the a different growth potential are also attractive
active,” says Moermann. iPhone [for example],” says Black. targets, as well as those with board compositions
“In Asia,a lot of companies are kept underval- Much research has been done to determine that do not meet governance standards.
ued so that the majority shareholder can take the CO N T I N U E S N E X T PAG E