- 1. The London Business School/ECGI Paper: Returns to
Shareholder Activism& 2007 Global Issues Presentation by Peter
R Butler Founding Partner & Chief Executive Governance for
Owners LLP www.g4owners.com Governance for Owners Company Directors
Conference 2007 Australian Institute of Directors Shanghai May
2007
2. What is relational investing?
- Investing in underperforming public companieswhere value can be
added through exercising share owners rights
- Engaging with the executive and non-executive teams of investee
companies onstrategicandstructuralgovernance issues
- Consulting with other investors and share owners on ownership
issues
- Engagement by informed, responsible owners providing the
catalyst for change that can unlock value in underperforming
companies
- Created by Bob Monks when he launched the LENS fund in the US
in 1992
- The ultimate active investment strategy but it requires a rare
mix of skills and experience
3. Relational Investing - Matters on which to engage
But owners must not micro-manage Strategic governance Structural
governance 4. Is relational investing simply activism?
- No.Some overlap but significant distinctions
- Responsible share owning, not shareholder agitation
- Relationship with companies we look to workwithboards and
management
- Applies private equity techniques to public equity
investments
- Timeframe we expect each engagement process to take 2-3
years
- Act with the long-term interests of all shareholders in
mind
- Confidentiality we prefer to work privately with companies
5. Relational Investing requires a rare combination of skills
and experience
- Skills mix : corporate, investment analysis, strategic
analysis, M&A, regulation, corporate finance, institutional
relations, corporate governance and press relations
- Diverse background : board experience, consultancy, investment
banking, investment research, portfolio management, legal; with a
range of nationalities
- Independence : enabling us to resist pressure from influential
parties and avoid conflicts of interest
- Networking : broad-based contacts in business, finance and
media on a global basis
- Alignment of financial interest : between fund executives and
long term owners
6. The LBS/EGCI Paper : Returns to Shareholder Activism (4
thDecember 2006)
- A clinical study of the Hermes UK Focus Fund investment
approach and results
- Undertaken by four distinguished business school academics
- Covers the period 1998 to 2004 when Peter Butler and Steve
Brown set up and ran the Fund
- A rigorous and fiercely independent analysis of the Funds
performance
- Paper can be downloaded without charge from the Social Science
Research Network Electronic Paper Collection
at:http://ssrn.com/abstract=934712
7. Why is the paper so significant?
- Provides the first robust evidence that shareholder engagement
can be effective
- Confirms it can have a substantial influence on corporate
activities
- and that it can generate significant excess returns
(alpha)
- Shows that collaborative engagements are no less effective than
hostile episodes, and are a lot swifter to execute
- Suggests that the engagements studied had a lasting positive
effect on corporate performance
8. Background
- There has been only a limited amount of activism observed in
the pastWhy?
-
- Fund managers historically have not undertaken extensive
engagement due to free ride effect and conflicts of interests
-
- The US legal and regulatory frameworks make it difficult to
influence Board behaviour
- Majority voting and relative ease of calling EGMs in the UK
make it a more fruitful environment
- Institutional investors in the UK are well organised and
practised in collaboration (e.g. ABI, NAPF)
9. The Hermes UK Focus Fund
- Created by Peter Butler and Steve Brown with help and support
of Bob Monks and launched in 1998
- The Fund bought additional stakes in underperforming UK
companies already held by Hermes indexed fund (which typical held
1% of each UK stock)
- Engagement with the boards and management teams was then
undertaken to bring about change and eventual share price
re-rating
- The Fund outperformed the FTSE All Share index by 4.9% per
annum net of fees over the 6 year period 1998-2004
10. What factors did the study analyse?
- The study estimates that 90% of the Funds out-performance came
from the engagement activities
- Documented the teams stated objectives of the engagements
-
- capital structure changes
- Categorised style of engagement (which was driven by companies
reactions to the engagement)
- 41 investments, 30 engagements
11. What were the objectives of the engagements?
- 28 out of the 30 involved restructuring of diversified
conglomerates
- In more than half of cases a change of Chairman or CEO was
sought
- Also in more than half, increased cash payouts were sought,
often related to specific divestments
12. More detail on the engagements undertaken
- 41 investments; 3 not in the Fund long enough to measure; 8
sold swiftly due to out-performance caused by exogenous events
- Differing reactions led to three styles of engagement:
-
- confrontational: disagreement about the Funds objectives from
the outset; often led to changes of chairman/CEO
-
- collaborative: target agreed with objectives and implemented
changes in co-operation with the team
-
- mixed: attitude was neither collaborative nor wholly
confrontational
- Engagement with other shareholders also important largest three
shareholders averaged nearly 20% of the equity, highest in
confrontational episodes
- Confrontational engagements took, on average, nearly 3 times as
long to complete as collaborative
13. Some interesting observations
- Exceptional high number of meetings with companies average over
9 times in each engagement, highest 48
- Contacted other shareholders in 80% of cases; corporate brokers
in 70% and headhunters in 26% of cases
- In only one case was a question or agenda item raised at an
AGM
- In only two cases were votes against management solicited
- Three EGMs were planned but none actually requisitioned
- Only one US style class action, but the Fund chose not to take
part
- Two rights issues were blocked
- Of seven press campaigns, only 2 were initiated by the
Fund
- Of four takeovers seen, none were induced or facilitated by the
Fund
14. Event studies on outcomes
- Detailedstudies on individual events to identify whether the
Funds engagements were value enhancing
- Identified detailed objectives that led to specific
announcements
- 98 individual events identified across the 30 engagements
- Event windows around the announcements used to measure the
abnormal returns
- Event windows varied from 3 to 11 day periods
15. Results of the event studies
- Mean cumulative abnormal returns (CARs) ranged from 3 to
4%
- When events containing other corporate news were excluded, the
mean CAR was higher at 5.3%
- The largest CARs (6%+) were associated with restructurings,
asset or division sales and changes of CEO and chairman
- Mixed and collaborative engagements produced events with higher
CARs than confrontational engagements
- Limited evidence suggests that company performance (measured by
ROA) was better one year after engagements than before
16. Smith & Nephew -a case study
- 1998 a healthcare conglomerate with five disparate
divisions
- October 1998 stake bought; action plan to reduce conglomerate
discount identified in advance
- December 1998 meeting with new CEO revealed similarity of views
on actions required; letter sent outlining concerns about Chairman
succession and excess free-cash flow
- 1999 several non-core businesses disposed of; Chairman retired
and replaced by outsider
- 2000 further significant disposals and return of 415 million to
shareholders followed by a letter from Fund to congratulate
- August 2001 letter confirming sale of stake by the Fund
17. Linking out-performance to engagement
- Detailed attribution regressions used to disaggregate
results
- Results support view that performance was associated largely
with the reversal of previous corporate under-performance
- Aggregating the returns from each event indicates that 92% of
the Funds out-performance was derived from the effects of the
events ie from the engagements
- 14.4% of the out-performance came from collaborative
engagements; 30.5% from confrontational and 55.1% from mixed
engagements
- But collaborative engagements were on average much quicker to
execute
18. Conclusions
- The paper concludes:In contrast to much of the previous
literature, this paper has reported substantial effects and
benefits associated with shareholder activism in the form of
private engagements by an activist fund
- The study provides robust evidence that our style of engagement
changes companies behaviours and delivers exceptional investment
returns
- Bulk of the out-performance comes from engagement meaning the
results are largely uncorrelated with other investment styles and
therefore a great source of diversification
- This approach has now progressed at GO and is being
successfully applied by the same senior team to pan-European
companies where the opportunities are huge
- We also expect the approach to be successful over time in
Asia.A brief case study on the recent ISETAN (Singapore) engagement
follows
19. Isetan Singapore event-driven strategic engagement
- Isetan Singapore retailer womens apparel - 61% owned by Isetan
Japan
- Minority shareholder concerns spanning several years and raised
at AGMs
-
- No indication as to how or if the S$60m tax credit would be
used
-
- Independent directors had adopted an increasingly partisan
management attitude
-
- 2 independent directors brothers, on the board since 1981 and
family ties to Isetan
- Group of 43 minority shareholders request an EGM which board
calls for Jan 10
- Resolutions to remove the incumbent independents and replace
them with shareholder nominated directors ( Tan Lye Huat , Eng Guan
Siah, Soh Suwe) => Tan Lye Huat is GOs partner on governance and
engagement in S.E. Asia
- Resolutions voted down (unsurprisingly) but company committed
to address special dividend/tax credit issue (in cooperation with
controlling shareholder)
- Feb 7 Isetans announcement that it was working with advisors on
a solution => +3% in share price at a time when the wider
Singapore market going down
- Feb 27 Isetan proposed S$1.50 special and final dividend but no
rights issue
- Several other Singaporean companies subsequently made similar
commitments
- Isetan share price rose 41%, from S$4.72 to S$6.65 over period
of engagement
20. Isetan comment and share price performance I feel it's
important to be part of the process that promotes greater
shareholder activism in Singapore, which will eventually lead to
improved standards of corporate governance. minorities can
influence outcomes if they act in the right spirit and intentions.
Tan Lye Huat, Business Times Singapore, 29 Dec 06 Mr Tan, who is a
well respected expert in the field of corporate governance,
deserves special commendation for being willing to stand up for the
minority shareholders although he was himself not a shareholder of
the company.Isetan also deserves kudos as they showed a willingness
to engage and compromise with the minority shareholder community.
Ang Hao Yao, Business Times Singapore, 6 Mar 07 Isetan Singapore
share price vs Straits Times Index Oct 06 Mar 07 21. Team of
experienced investors and engagement specialists Paola Perotti,
ManagingDirector 13 years as an investment banker, engagement
specialist for 3 yearsPeter Butler,CEO 20 years corporate
experience, 10 years as an engagement specialistSteve Brown, CIO
Over 20 years as a fund manager, broad experience of UK and
European markets. 14 years in engagement Diverse backgrounds
working on investment and engagement Robert
Machell,InvestmentDirector Fund manager for over 12 years,
extensive knowledge of European equities Robin Hindle Fisher,
ManagingDirector Over 23 years investment management experience
with extensive engagement involvement Michelle Edkins,Managing
Director Over 9 years experience in corporate governance,
institutional relations and engagement 22. Issues for discussion
2007
- Development of Principles for Responsible Investment (UN
initiative)
- Bribery and corruption in Europe
23. For more information contact
- Or visit Governance for Owners website:www.g4owners.com
- Or contact our regional advisor Tan Lye Huat, HIM Governance
Pte Ltd