Shareholder Activism – A Monthly Snapshot – February 2017
The Month in Review
Elliott Management, the activist investment group, has called for the removal of Klaus Kleinfeld as chief executive of Arconic, the specialist metals and components company created last year by the break-up of Alcoa, arguing that “current management’s persistent failure…has destroyed considerable shareholder value”. Financial Times, 1st February 2017
Activist investors in Europe are getting bolder and becoming more assertive in the way they deal with companies, following the example of their US counterparts. They are also benefiting from changing attitudes among other shareholders. Financial News, 8th February 2017
An influential adviser to big investors has called for a revolt against Franklin Templeton at the company’s annual meeting, piling further pressure on the emerging market specialist. Pirc, which advises investors with combined assets of more than £1.5tn, has highlighted “excessive” pay and a lack of director independence at the fund company in a document recommending how pension funds and asset managers should vote at the company’s meeting. FTfm, 12th January 2017
Several of the world’s most powerful shareholders are planning to take even tougher action on excessive bonuses for company bosses in 2017 after investor protests over executive pay reached a five-year high last year. Large investors including Fidelity International, Aberdeen Asset Management, Calpers, Standard Life and Henderson Global Investors said that they are planning to crank up pressure on boards to reduce excessive pay and introduce greater transparency in 2017. Financial Times, 13th February 2017
New research has identified the UK as one of the most at-risk countries for shareholder activism. Outside of the US, the dominant market for activism, the UK, Canada and Australia have been judged to be vulnerable because of the strong US dollar, undervalued asset prices and “increased global scrutiny of corporate governance standards”. City A.M., 15th February 2017
Tiffany has reached a deal with activist investor Jana Partners to appoint three independent directors to its board and oversee the search for a new chief executive after a difficult time which has seen the luxury jeweller report sales declines in seven of the past eight quarters. Financial Times, 21st February 2017
The French jet engine maker has accused one of Europe’s largest activist hedge funds of wanting to “destroy value” in its attempt to scupper an agreed €8.5bn takeover for rival Zodiac Aerospace. Safran’s management said TCI was making “baseless” claims, and cast doubt on the fund manager’s understanding of both French corporate governance laws and the aerospace industry. Financial Times, 24th February 2017
In the Spotlight
‘Say on Pay’ No More?
Two months into Donald Trump’s mandate, it has become clear that the new U.S. President is determined to go ahead with his pledge to roll-back parts of the Dodd-Frank act.
The move will not only mean lower bank costs and capital requirements for financial services players, but also lead to shareholders losing influence over CEOs’ pay packages. For those who gained the right to have a say on such decisions over the past few years this is a concern, and not only in the U.S.
Interestingly, the U.S. move contrasts with a trend we are seeing in the UK — whereby top City investors are beginning to pressure companies and ministers to get tougher on executive pay packages, with some going as far as introducing a proposal to force out the chairs of companies’ boardroom pay committees if a big minority of shareholders fail to back their annual remuneration plans.
A Financial Times article published last year shortly after Trump’s election victory, stated that scraping Dodd-Frank would reduce the leverage institutional investors have over corporate boards.
At a time when news items on shareholders’ revolt against management rewards make headlines across the world on a weekly basis, it is not outlandish to think that there will be resistance amongst shareholders to let go of the option to ban ‘reward failure’ proposals made by companies’ management teams.
Dodd-Frank’s say-on-pay rule introduced in 2011 allows shareholders of public traded companies to weigh in on executive compensation at least every three years. A similar rule also exists in the UK since 2013. To remove it, would mean a change in the engagement between companies and investors.
Above all, it would also mean that by pure shareholder pressure the say-on-pay option could stay in place even if Dodd-Frank itself is repealed. As Jon Lukomnik, from the Investor Responsibility Research Center Institute in New York, cautions: ‘proxy advisory firms could propose that clients vote against directors at companies without say-on-pay’ before adding that ‘a company that withdraws it is going to make itself a target’.
It is forecast that 2017 will be a year when several of the world’s most powerful shareholders will take tougher action on excessive bonuses for company bosses — a move that reached a five-year high in 2016.
With such cranked up pressure and a demand for greater transparency, Dodd Frank’s say-on-pay might be no more, but the threat of shareholder activism hitting the boardrooms of the corporate world probably also means that, regardless of Trump’s policies, shareholders will not give up ascertaining their rights and force their option to have a say on pay to stay put.
The Big Picture
Boss Joe Kaeser has carved out businesses, cut red tape and lifted payouts, all without outside pressure from militant shareholders. The group’s impressive quarterly results and a better 2017 outlook vindicate the approach. Yet valuations have yet to reflect his success. Breakingviews, 1st February 2017
Sports Direct’s Mike Ashley and French Connection’s Stephen Marks both don’t enjoy being told how to run their business. Thus excellent entertainment could be in prospect now that Sports Direct has bought control of an 11% stake in the struggling fashion chain. The Guardian, 2nd February 2017
Elliott Management may have fumbled on its campaign against aluminum-parts maker Arconic, but CEO Klaus Kleinfeld still has some explaining to do. Arconic split from its mining and smelting business last year, a move Elliott backed. But the activist hedge fund said it was nominating five candidates to Arconic’s board and calling for Kleinfeld to be replaced with a CEO better suited to cut costs. Bloomberg Gadfly, 7th February 2017
The travel group’s board suggested a new strategic share incentive plan (SSIP) paying up to 225% of chief executive Peter Fankhauser’s salary as a bonus. Shareholders refused the plan after the board failed to provide sufficient information on exactly what strategic objectives would be selected to gain from the plan. The decision saw the board amend the SSIP to include specific targets and a 200% cap – should it ever be put in place. The Times, 10th February 2017
Stada barely earns its cost of capital on its investments. One shareholder, Active Ownership Capital, clearly thinks cost cutting should be prescribed. Since the activist took a stake last summer, the chairman has been replaced. Stada has promised to trim the cost of sales by €65m by 2020. That will not lift profits much. Other generic makers do a better job. FT Lex, 14th February 2017
In an era when innovators are prized, fewer investors are able to hold management to account. Today’s many high-tech entrepreneurs, including the founders of Snap, the Californian company that runs the popular mobile messaging app Snapchat, are adopting disdainful attitudes towards shareholders. Financial Times, 22nd February 2017
Asset manager GAM has been urged to shake up its board by an activist fund. The Swiss group’s performance and governance make it vulnerable, but fund managers are tricky targets: the industry’s fee structure is challenged, costs are high, and regulators demanding. Breakingviews, 27th February 2017
The Month in Numbers
€65 m The amount Stada promised to trim off the cost of sales by 2020, FT Lex
11% The stake Sports Direct bought in French Connection, The Guardian
225% of salary — the bonus Thomas Cook’s board proposed to pay CEO Peter Fankhauser, The Times