Winter is coming...
…Be prepared for active and activist investors

Winter is coming...
…Be prepared for active and activist investors

29 March 2017

Taking a different approach to engaging with activist investors means reframing investor relations mindset

In keeping with our approach of working with listed companies on their communications with shareholders, we’re looking at a specific group of shareholders in this commentary, activist investors. Much of it centres around the premise that the reactive ‘break the glass in an emergency’ approach is no longer best practice and that companies need to take a more proactive approach.

While we totally agree with this, we want to completely reframe the discussion by changing the terminology – from activist to active investor. It’s a subtle shift but an important one. The term activist is a pejorative one – someone wanting to force change on a company that then has to ‘fight’ against them. While in some instances (take TFS) this is the case, but its not necessarily true in all cases. Hostile activist investors create a mindset within companies, especially in the investor and corporate communications areas, based on reacting to the ‘threat’ to ‘protect the company’. It's a battle rather than a conversation. With active investors this isn’t the case.

If we shift the ground slightly by understanding engaged investors as ‘active’ investors the approach to and engagement with them fundamentally changes. As one of many shareholders active investors are just that, more active and as such are more engaged, interested and willing to discuss the performance, management and decisions of the company, which they are legally entitled to do.

At ArmstrongQ we refer to this group of shareholders as active investors and this group forms one of many groups of shareholders within our Shareholder Value Proposition approach.

Active investors in Australia

The Australian corporate landscape has changed significantly in terms of the active investor. Alongside local active investors such as Gabriel Radzyminski (Sandon Capital), Mark Carnegie (Companion Fund), Alex Waislitz (Thorney Opportunities), Simon Marais (Allen Grey), Geoff Wilson (Wilson Asset Management), more foreign active investors, proxy advisers (such as ISS and Glass-Lewis) and portfolio managers are entering the market. Interestingly, JP Morgan reports that foreign active investors are more likely to employ complex strategies and use sophisticated tactics, show less tolerance for unresponsiveness to their concerns and are showing a greater willingness to target larger companies

Many active investors also have institutional support (think Australia’s large superannuation funds), who are no longer management friendly and ground their campaigns on value maximisation themes – putting forward specific value propositions rather than solely calling for board spills. Think Bellamys as one example, Solomon Lew (perhaps) as another and the murmurings around Ardent Leisure as an unfolding active investor dynamic. We wouldn’t put the recent machinations behind TFS Corporation and the actions by Glaucus Research Group in the active investor group, this is definitely an activist action.

Engage your active investors early and often

In an article written by Bain & Co, Agitators and Reformers: How to respond to Activist Investors, they noted that: ‘If you are passive in your dealings with investors – if you simply adopt a ‘the market will figure this out if we stick to our knitting approach’ ¬– you are vulnerable.’

Common advice in relation to dealing with active investors is to build a relationship with them, but just how do you do this in an efficient and effective way while juggling the competing demands of other shareholder groups? As part of our Shareholder Value Proposition approach we work with companies to help them think strategically about this, develop a long term communications plan for this group, and ensure that the key messages, information and engagement are delivered across all communications groups within the company (investor relations, marketing, corporate communications, board and senior management).

Of course, all the communications planning and engagement in the world won’t protect a company and/or board that is underperforming, who is unclear about its strategy or value-creation plan or whose financial performance is sub-par. This is where a proactive shareholder engagement plan can provide much needed feedback to the board and management.

Proactive shareholder engagement that focuses management attention on the feedback of the most critical active investors can provide boards and management with vital feedback, information to galvanise action, early or a wake-up call. In this way the investor relations team can help deliver critical and tangible business intelligence.

Philip Baker from the AFR notes that: ‘In the US the boards o f public companies can spend up to 30% of their time dealing with the issues so-called activist investors there might have so it’s something local companies may have to get used to.’ How to spoil a sellers party, AFR 28 March 2017, page 30.

Our Shareholder Value Proposition approach incorporates a review of the active investor element of a listed company’s shareholder register and stress tests your strategy, approach and communications tools to engage with them.

With March to the end of July being the period for most activist activity (and when AGM season looms and shareholders have an opportunity to use the scheduled director re-elections to achieve their desired outcomes), make sure you are not only prepared but that you have identified and engaged with active investors.

The raid on TFS last week has changed the game in Australia with active investors. Call me to discuss how you can develop and implement a proactive and productive IR engagement with them. Carlton Boyse on 9262-2130 or carlton@armstrongq.com.au