Challenge for fund managers as institutional activism hots up
Amid corporate mistakes and malfeasance, fund managers need to step up their shareholder activism
"Come and face the crowds. I’m not threatening you … but we’re going to war with you," Hassen Adams, founder and executive chair of Grand Parade Investments (GPI), told disgruntled shareholders ahead of an extraordinary general meeting of shareholders to be held in Athlone.
That response was probably a little more robust than the shareholders had anticipated.
All they were asking for was the appointment of two independent directors to the board. Adams’s attitude to the proposed appointment of the two experienced and well-regarded individuals — former Spur CFO Ronel van Dijk and former SABMiller executive Mark Bowman — suggested he believed they represented the first line in a dastardly plan to unseat him.
The activist shareholders, which included Kagiso Asset Management and Denker Capital and hold 12% of GPI, claimed a much more modest ambition: they hoped the two directors would help the group recover from its long-term underperformance.
The share price has been in decline for years and is now at a discount of around 70% to its intrinsic NAV.
The very public GPI spat was reminiscent of the board implosion at PPC back in 2014, which was triggered by the departure of CEO Ketso Gordhan and driven by the subsequent efforts of a few shareholders to get him reinstated.
The PPC case propelled shareholder activism into new territory as traditionally publicity-shy institutional fund managers (Foord Asset Management, Visio Capital Management and Nedbank Private Wealth in that case) led a campaign to appoint a completely new board.
It made for compelling media fodder because it offered a rare public glimpse into boardroom politics. Perhaps for the same reason, the campaign was a disaster.
During the PPC battle the share price moved steadily weaker and in early 2015 the overwhelming majority of shareholders backed the incumbent board, confirming the long-held belief that institutions fear rowdy challenges to the status quo even more than the prospect of an underperforming investment.
It is this fear that shapes their preferred style of engagement, which is to chat to intransigent boards behind closed doors. Sometimes it works.
David Kneale’s swansong at Clicks, the recently announced 15% increase in profits for the year ended August 31, was a useful reminder of one of Coronation’s successful interventions.
Back in 2005, after five or so years of underperformance, the fund manager decided something had to be done at Clicks — quickly and quietly. Kneale was persuaded to leave his job as commercial director of the UK’s biggest pharmacy retailer, Boots, and head to Cape Town. Last month he announced he would retire at the end of December.
During his 13 years at the helm the value of Clicks shares has risen 2,427%, far ahead of the other counters in the food and drug retailers index.
It’s fair to say the Clicks intervention was a successful one.
And while Allan Gray’s involvement with Net1 over the SA Social Security Agency debacle earned it some brownie points, the same cannot be said for its high-profile intervention at Group Five.
Given the grim conditions in the building and engineering sectors it’s impossible to say if the July 2017 appointment of eight new nonexecutive directors exacerbated the collapse in the share price from R18 at the time to R1.28 now. It can’t have helped.
Tongaat Hulett CEO Peter Staude’s decision to take early retirement (several years too late, according to some) is understood to have been prompted by fund managers.
The preference for engagement behind closed doors has meant that activism beyond voting against the remuneration policy has largely been left to determined individuals such as Theo Botha, Chris Logan and Albie Cilliers.
There’s little doubt these three on their own have had more impact on corporate governance than the combined might of the institutions — Botha, by highlighting executive pay matters; Logan, through his battles with overpaid and underperforming executives at Tongaat Hulett and Trencor; and Cilliers, by taking on Sovereign Foods, HCI and, most recently, African Phoenix.
In the past few months even tightly resourced NGOs such as the Centre for Environmental Rights and Active Shareholder have started to play a strategic role in calling powerful corporate executives to account.
This comes after a year during which civil society played a decisive role in the Gupta state capture saga.
The moral high ground that business believed it occupied has been white-anted by a series of corporate scandals from Steinhoff and Resilient to Tongaat Hulett, and by mounting evidence that key corporate sector entities such as audit firms and consultancies were part of the corruption problem.
As the year draws to an end, the powerful fund managers are in danger of becoming redundant or, worse, the enablers of a corrupt system.
Their customer base not only wants more activism — on issues from underperforming executives to corruption and environmental degradation — but it is also no longer prepared to pay hefty fees.
So far Old Mutual is the only one of the large institutions to take on the challenge publicly. In August it issued an open letter to CEOs in a bid to spark dialogue about how to create long-term shared value.
In September the JSE followed up with the release of a consultation paper.
Rob Lewenson, governance and engagement manager at Old Mutual, talks of a shift in activism in the past year. "There’s a real sense of activism brewing among shareholders, it’s impossible for anyone to ignore." He says fund managers are under pressure to do more than just change directors and are now looking at ways of partnering to effect real change without bumping up against competition rules.
Asief Mohamed, chief investment officer at Aeon Investment Management, says pressure is also coming from global clients that want to know about environmental, social and governance engagements. "Like it or not, fund managers are going to have to step in a lot earlier."
This means letters to the Resilient board after the destruction of much wealth will not suffice, nor will tagging on to class actions against possible rogue directors be regarded as effective handling of Steinhoff-type scandals.
Logan says if the large fund managers are not prepared to take a stand they should at the very least back the activists who are. "Their lack of action has contributed to huge value destruction in the past five years," he says.
And so, despite the prospect of Adams-type responses, fund managers may have to consider taking to the battleground more often.