Activists become wolves in sheep’s clothing

When Elliott Management revealed in December that it had taken a stake in Pernod Ricard, the activist investor partly blamed poor governance and the Ricard family’s outsize influence for what it said was underperformance at the world’s second-biggest spirits maker.

Weeks later, chief executive Alexandre Ricard unveiled a big change to the company’s board, appointing the influential Patricia Barbizet as an independent director.

The maker of Martell cognac and Jameson whiskey also said Pierre Pringuet, the former chief executive and longtime confidant of the founding Ricard family, would no longer be vice-chairman but would stay on the board.

Mr Ricard was at pains to point out that Ms Barbizet’s appointment had its roots in a “thought process started in July 2018”.

However, the argy-bargy over Pernod Ricard’s board was the latest sign of how activist investors have made their European campaigns personal.

Activists such as Elliott, Trian Partners, Third Point, Starboard Value and ValueAct take stakes in companies and then lobby for change to try to improve a business’s share price. After years of being criticised for seeking short-term gains only, many activists’ campaigns now include issues such as board independence, in part to win the support of traditional investors.

“Activists are smart. They realise they can get support by including diversity or board independence as part of their campaign,” says a senior individual at a large European asset manager, who deals with activists.

Another figure at a big UK asset manager says activists in Europe take inspiration from the US, where campaigns, almost by tradition, become personal.

“In the US, activists realised that if they are going to win, they need the governance people aboard. What they started to do was include things like splitting the role of chairman and CEO,” he says.

“They know there are governance buzzwords and if they can get the governance community to buy into that, there is more chance of them buying into the rest of the campaign.”

A survey by SquareWell Partners, a shareholder advisory company, found that 87 per cent of active fund managers — that cover $10.4tn in assets — were more likely to support an activist seeking to improve corporate governance.

Collective board expertise was cited as the joint most-important governance issue, along with capital allocation decisions. Board independence ranked third, ahead of the quality of chairmanship and executive pay.

Ali Saribas, a SquareWell partner, says activists will often try to bring boards in line with guidance from proxy advisers. Investors use these companies, one example of which is  Institutional Shareholder Services, as they decide how to vote at shareholder meetings. ISS may, for example, recommend a vote against a chairman who sits on several boards.

“Activists view governance as a tool,” he says, pointing out that they use it to help win support from traditional asset managers or force companies to take action.

According to figures from Activist Insight, the data provider, board-related activism has held steady this year in Europe, despite a slowdown in campaigns overall.

Their record of success is mixed, however. Sherborne Investors failed to appoint Edward Bramson, its founder, to the  board of Barclays bank, while Amber Capital lost a proxy contest for a seat on the board of Hellenic Telecommunications of Greece.

Conversely, Elliott gained three supervisory board seats at SLM Solutions, the German 3D printer, while Cevian secured seats at Autoliv, the largest maker of airbags and seat belts.

Rich Thomas, head of Lazard’s European shareholder advisory practice, says investors now take a global perspective and expect similar standards of governance wherever they are in the world.

At the same time, active managers are under pressure to be more than just stockpickers. They are taking their years of experience and using that to take a “stronger role in guiding companies”, he says.

“When you have these two coming together, it is really putting sharp pressure on boards . . . and that is an opportunity for activists,” he adds.

According to Activist Insight, 53 companies in Europe were targeted with board-related demands in the first half of 2019, compared with 93 in all of 2018. The UK has seen a large rise, with 25 companies targeted with board-related demands in the first half of 2019, compared with 17 in 2018.

Patrick Sarch, a partner at White & Case, the law firm, says sometimes a governance-related campaign is not what it seems. He says activists can agitate for a change in strategy behind the scenes but if they don’t win, their public focus may be governance.

“In those cases it looks like a governance campaign but it can actually be about the strategy,” he says.

Another factor that has refocused activists’ attention on boards is the rise of passive investors, says Mr Sarch. Passive investors do not have the option to sell their stake, which means that if they dislike a company’s strategy, one of their only options is to vote against directors. Activists are looking to tap into this, he adds. 

There are question marks, however, over the extent to which a focus on governance can improve performance.

Writing in the Financial Times, Hernan Cristerna, global co-head of mergers and acquisitions at JPMorgan Chase, said that traditional activist campaigns, such as those focused on changes in companies’ capital structures, corporate governance or executive pay, underperformed the market by 1.8 percentage points. In contrast, campaigns targeting a mergers and acquisitions-related event outperformed by 12.5 points.

Mr Thomas says value creation is the strength of activist campaigns. “That is where shareholders are moved to support. The governance side is the crack in the armour that then creates the event that leads the change,” he says.

Companies that want to avoid activists’ attention should think not just about strategy but governance, he says. “Governance should be an advantage, it should be something that strengthens shareholder support. It should not be something that is a vulnerability.”