Shareholder Activism In Asia

Can Asian companies thrive in this new era?

Originally published in the June 2017 issue

Shareholder activists have long been a feature of corporate life in the United States. But as the field becomes more crowded at home, established US-based activist investors are looking overseas for opportunities. And their focus has been on companies in Asia.

Analysis from Activist Insight highlights the number of activist public actions in the region has steadily increased in each of the past four years. Asian companies are now more targeted by activists than their counterparts in Europe.

There is no doubt that the public profile of engagements between activists and boards in Asia is growing, be it arguments over corporate structure in South Korea, questions regarding capital in Japan, or demands for reorganisation and divestitures in Australia.

Previously, Asia has been seen as a relative backwater for shareholder activism. This is partly due to a greater propensity for listed companies to have controlling shareholders, often founders and family interests, or embedded government interests. The prevalence of cross-shareholdings among groups of affiliated listed companies is also an issue, as is greater relative passivity among institutional and retail investors, cultural resistance to US-style activism, and local environments that are generally less litigious and confrontational.

However, while culture is important, the disparity in shareholder activism between Asia and other markets is also a reflection of the maturity of the markets in question.

Like Asia, many listed companies in the most developed capital markets of the UK and US also started life as family/owner run firms or state-owned enterprises (SOEs). But as these markets developed, and the shareholder base widened, rules and regulations for enabling greater shareholder participation were enacted.

As Asian markets develop, and as overseas groups become more prevalent as investors in Asian companies, we will see a similar evolution. Across all Asian markets, boards will have to become more adept at dealing with approaches from activists.

There is also pressure from local investors. In Singapore, for instance, the Securities Investor Association of Singapore (SIAS) was established to develop an educated, engaged and empowered investment community. They aim to advocate for sustainable and stable stakeholder relationships in the investment community; safeguard and protect investor rights; empower investors through education and timely information; and promote fair and transparent corporate governance standards, regulations and practices.

As in so many other areas, Asian companies have a great opportunity to learn from the experiences of the US and other developed market companies. Rather than seeing activist shareholder campaigns in a purely negative light, boards across the region need to be prepared, open, and willing to engage with outside advice.

A recent study by Parthenon-EY points strongly to the benefits of shareholder activism. The study looked at activist campaigns reported by SharkRepellent from 2010–2015 and analysed before-and-after performance based on total shareholder return (TSR). It found that activist investors usually target large, asset-rich companies with revenues and margin growth that is slower than their sector peers. This creates an opportunity to extract value through capital restructuring and longer-term business portfolio change.

More importantly, actions driven by activists are powerful catalysts for unlocking shareholder value. The data shows that value was created faster in targeted companies than their sector peers over the same time frame.

So, there is clear evidence that activist campaigns can accelerate value creation. But in the US itself, boards took a long-time to accept this due to the commonly-held (and often misunderstood) view of activists as aggressively over-loaded, opinionated trouble-makers. If companies in Asia are to benefit more from the rising tide of activist campaigns they need to quickly learn the lessons that US executives are only now beginning to accept.

The critical first step is for boards to look at their company in a different way. Increasing shareholder activism requires changes in governance to maximizeshareholder value. Companies need to behave like activists to proactively execute changes around governance and create greater shareholder value.

The effective allocation of capital is a senior management team’s most fundamental responsibility. A typically successful capital allocation strategy strikes a balance between long-range planning and shorter-term imperatives. Research consistently shows that those companies with the most active capital allocation processes will outperform and ultimately achieve higher returns than those with more passive or infrequent allocation approaches. In the new-normal environment of tempered global growth, continual reassessment of where to deploy and recycle capital is how companies sustain their growth trajectory and maximize value.

In today’s environment of modest global economic growth and accelerating disruption, executives are taking extra care to re-examine and reassess their allocations to support long-term strategic goals. EY’s recent Capital Confidence Barometer found that 68% or respondents from companies in Asia have increased the frequency of portfolio reviews. While this is a healthy trend, from a governance perspective there are two critical aspects to think through. One is the objectivity of the scope of such reviews and the second is whether CEOs and boards resort to timely action resulting from such reviews. This is critical as there is also a mounting body of evidence that long-established board members are not necessarily best placed to point out areas of improvement or emerging disruptive trends that threaten the existing business.
Executive decision making is very often shaped by accumulated biases based on their past experiences about the business and industry, grappling with a particular and familiar set of questions and issues as well as their loyalty to stick by past decisions and actions. Such decision models can serve well when encountering similar experiences and circumstances. However, the challenge is when circumstances change significantly as they do when executives face profoundly different competitive challenges resulting from disruption.

Economic growth prospects in Asia Pacific markets, have shifted significantly over the past few years. Volatility in currency markets and commodity prices, continuous shifts in technology, changing consumer behaviour and shifting global economic prospects have made it difficult to assess risks and opportunities. Traditional or established models of decision-making may lack the rigor and flexibility to accommodate an environment characterized by complexity and unpredictability.

What companies and their senior management teams need is a radical new decision model that mirrors how activists will look at business performance, capital allocation, total shareholder return and future direction. New ways of thinking about how strategic decisions are made, how progress is measured, how current and prospective returns to stakeholders could contrast and how to use a flexible framework that provides built-in agility to continually filter consequences of their past capital decisions as well as emerging trends and challenges.

As part of routine governance, companies need an outside-in challenge to the status quo – to ask the difficult questions about the existing strategy, and to continually posit the “what if?” scenarios. The idea of a “Chief Disruption Officer” has been around for several years now. Perhaps there is an opportunity for an independent member of the board to play such a role. An independent outsider with a remit to challenge and question everything periodically may sound a radical step, but a logical first step to consider. Implemented properly, it will become part of a wider mind-set shift that will encourage the board to look at the whole company from an “outside-in” perspective.

As with established decision models, boards and executives can suffer from seeing the organisational or capital structure as set in stone. This may especially be the case where the company still has a large or controlling stake owned by either the state or founding family members. Certain assets or strategies are hard to challenge in these environments. What made the company successful in its early years may no longer be the right approach for future value creation, yet emotional ties may not allow them to see this.

Independent board members with a remit to challenge are a critical tool in a shareholder activism strategy. But, companies in Asia will also benefit from regular strategy workshops with external advisors to provide an “outside-in” perspective. These can cover both tactical operational issues and longer-term strategic direction, both of which are avenues of approach by activists.

The overriding opportunity for companies in Asia is to embrace activist approaches. To see them as a source of fresh perspective, as opposed to an uncalled for and unwanted imposition on the board’s time.

Key recommendations for successful strategic governance within an increasingly activist environment:

Become your own activist

  • Appoint a board member to act like an activist who is empowered to carry out an outside-in review of the business periodically
  • Support this individual’s efforts by making sure changes happen resulting from such reviews

Develop a 360-degree view of shareholder value and its key drivers

  • Take a rigorous, ongoing view of shareholder value from an investor’s perspective
  • Have a real-time view of capital allocation and business performance
  • Perform virtual carve-outs to understand the impact of value eroding businesses
  • Analyse potential strategies for trapped cash
  • Evaluate debt structure and ability to increase leverage
  • Assess working capital improvement opportunities

Adopt governance practices to address likely activist goals

  • Review board composition and duration to achieve objectivity and a fresh perspective
  • Seek a level playing field on the board with appropriate voting and nomination rights
  • Align executive compensation and incentives with desired outcomes
  • Provide a structure that allows for information transparency
  • Review strategy and champion board efforts to create real and relevant change

Most crucially, executives and board members should communicate frequently and transparently with key stakeholders. Whether shareholders are active or quiet, knowing and utilizing activist strategies will help companies to remain competitive and strengthen their businesses for the long-term.