Democracy is in: Here comes the activist investor

SOME of this year’s biggest news stories, such as the Arab Spring and the Occupy movements in London and New York, have a common underlying narrative. “The many” are unhappy about the actions of “the few”. Democracy is in vogue.

A similar narrative is emerging from some of the biggest business stories of the year. Shareholders are increasingly vocal, willing to agitate against boards’ decisions. Shareholders in G4S recently ensured that the proposed merger with ISS was dropped and shareholders in Olympus are clamouring for answers to allegations of unexplained payments.

What is causing the growth and is this a good thing?

Most shareholder activists suffered greatly in the 2008 crash and some of the leading funds shut down. In the period prior to the recent market turmoil, there was a perception that some companies under-performing the market were ripe for an activist agenda.

In the current climate there is also an audience for those willing to argue that executives are over-paid or are being rewarded for failure. Where an investor claims that corporate governance at a company has broken down, it is easy then to move to demand a change of strategy. Whereas prior to 2008, shareholder activists may have advocated that a company take on more debt, companies today are more likely to face claims to pay down debt.

Recent changes to the Takeover Code may also increase the amount of shareholder activism. The changes make it more likely that an approach from a bidder will be made public and bidders will need to be certain of their intentions prior to making an initial approach. This may result in those who would previously have approached targets with a takeover bid instead acquiring a stake in a company and using an activist agenda to create value.

Rules on market abuse and insider-dealing have made brokers increasingly wary of canvassing shareholder opinion prior to announcing a corporate event. Ten years ago, unpopular transactions would not have seen the light of day because key shareholders would have been willing to have been “brought over the wall” prior to announcement. Today, large institutional investors cannot agree to be insiders for sufficiently long for proposed transactions to be pre-marketed. Shareholders have no option but to take a more public stance against a board because the private avenues have been shut down.

New social media tools also allow shareholders to frame debate and discussion, and shareholders do appear to be more willing to find their voice and to stand up to their boards; a recent example being the somewhat stormy general meeting of Chelsea Pitch Owners.

Not all activists have noble motives. Some simply want to agitate to pressure the board to find a buyer to take over their stake. But in our view, an increase in shareholder activism is to be welcomed; it can be seen as a form of self-regulation. There has been so much criticism of the role of regulators, corporate governance principles and non-executive directors in protecting the interests of shareholders against corporate excess; shareholder activism is ready to move to the mainstream and fulfil this role.

Ross Bryson also contributed to this article. Both Bryson and Sender are corporate finance partners at Mishcon de Reya.