The emergence of activist investor Elliott Management on the register of BHP, one of Australia’s largest and oldest companies, has once again shone the light on the rise of shareholder activism.

What is shareholder activism?

In its simplest form, shareholder activism is the active engagement with companies by shareholders with a view to enhancing the value of that investment. The activism is underpinned by the belief that the company is either not managing the business optimally, or asset values are not being maximised in the existing structure.

Why is shareholder activism on the rise?

Shareholder activism is not a new phenomenon, but there has been an escalation in the number of cases in Australia in recent years, and a broadening of the participants. Australia has become a more attractive market for activism for several structural reasons:

  • The relatively low shareholding threshold of 5 per cent required to call an Extraordinary General Meeting (EGM) and nominate directors. This allows activist shareholders to leverage small shareholdings;
  • The introduction of the ‘two-strike rule’ in 2011, under which shareholders have the power to vote against a company’s remuneration report at its Annual General Meeting (AGM), and at the subsequent meeting potentially remove the entire board. This rule has provided a convenient, public and very powerful tool that has fanned the flame of shareholder empowerment;
  • Recent regulatory changes that now allow certain types of co-ordinated behaviour between investors without triggering ‘associate’ provisions in the Corporations Law.

These changes have driven a rise in the number of international activist funds targeting Australian companies and the emergence of Australian pension funds, who are placing increasing emphasis on Environmental, Social and Governance (ESG) factors, as key players in activism.

FTI Consulting ranks Australia third on its global shareholder activism threat list.

Source: FTI Consulting

The increased focus on governance generally has also strengthened the relevance of proxy advisor firms in Australia such as Ownership Matters, CGI Glass Lewis and ISS. These firms provide an efficient and powerful channel for this type of activism by large industry fund and corporate superannuation fund shareholders. Given their size in the Australian equity market, these funds have become important players in the activism landscape. The methods are usually less visible, with most activity happening out of the public eye. The two-strike rule has galvanised the large industry and superannuation fund sector which, with the assistance of proxy-advisor firms, now has a more efficient way to express disapproval with management remuneration. The highest profile example of this activist tactic was the voting down of the remuneration report of the Commonwealth Bank, Australia’s largest company, in 2016.

At the more aggressive end of the spectrum, shareholder activism includes battles waged in the public forum in an attempt to gain support from other shareholders. This activist model leverages a relatively small shareholding with public and aggressive lobbying to force a change in board composition, management or strategy. Recent examples include Elliot/BHP, Ardent Leisure/Ariadne and Bluescope Steel/Sandon. These models tend to be favoured arguably more by shorter-term opportunistic investors than the larger more conservative superannuation funds.

What are the consequences of increased shareholder activism?

One of the positive outcomes of increased shareholder activism is more engaged company boards that must now be proactive in identifying potential vulnerabilities in strategy or management that may open the company to threat of damaging and distracting activism. This higher level of accountability may result in superior shareholder returns.

However, some of the more aggressive and public activist campaigns could be seen to be pressuring companies into short term decision-making that may provide windfall profits to the activist, but ultimately destroy long term shareholder value.