April 13, 2015
Tackling Activism in Asia
Since the global financial crisis, shareholder activism has surged, particularly in the US, where the likes of Carl Icahn, David Einhorn, Bill Ackman and Dan Loeb have achieved celebrity status. The world’s largest endowments, family offices and sovereign wealth funds can now be counted as their clients. Globally, these activists are being taken seriously; it is time for management teams in Asia to follow suit.
Historically, Asian corporates have perceived activism as a far-flung US problem. The prevalence of family-controlled listed companies, shareholder unwillingness to challenge management teams and a cultural etiquette that discourages public confrontation have resulted in a dearth of shareholder activism. However, profound change is afoot: recent actions taken against Asian corporate heavyweights Bank of East Asia, Fanuc and Noble by Elliot Management, Third Point and little-known outfit Iceberg Research, respectively, have all raised eyebrows. Hedge funds have not been alone in agitating for change. Other institutions, including SWFs and pension funds, are increasingly voicing their opinions and concerns on a number of issues, particularly governance. In parallel, governments and regulators in Asia are in the early stages of reshaping the corporate and investment landscape, as evidenced by the recently implemented Japanese Corporate Governance Code and Hong Kong’s Securities & Future Commission’s consultation paper on the Principles of Responsible Ownership. These developments could signal a more widespread adoption of international best practices in governance and investor engagement.
Against this backdrop, Asian management teams need to prepare for the shifting landscape. As a starting point, they would benefit from seeing activists less as Gordon Gecko-type corporate raiders and more as seasoned investors who can assist them in unlocking value and driving growth. Although securing seats on boards, lobbying for share repurchases and effecting management change remain priorities, activists’ goals are evolving. Increasingly, they are calling for companies to make strategic pivots, better deploy cash and improve ESG policies.
Activists are changing their approach too. They are more than willing to play the long game and tackle both large and small companies. In Asia, activists have tended to be opportunistic, focusing on situations where they believe they have greatest leverage, such as transactions involving a change of control. This was evident in Elliot Management’s attempted intervention in OCBC’s acquisition of Wing Hang last year.
From a communications perspective, activists have become more sophisticated: engaging with local and international media to build credibility and lobbying other investors. In Hong Kong, in particular, they are increasingly cognisant of the city’s unique retail investor dynamic and of the pivotal role media can play in exerting pressure on companies that are fiercely protective of their reputation in what is a very local market. Activists are increasingly developing a narrative that resonates with local audiences. In Hong Kong, they are purposely speaking up for minority shareholders and the value their work can add to capital markets. In Japan, they have softened their rhetoric in line with cultural sensitivities – perhaps best exemplified by Dan Loeb, who has shown restraint in his dealings with Fanuc and Sony.
For Asian corporates, it is critical to recognise that there is no silver bullet in dealing with an activist situation or short seller attack. However, most of the basic errors that targeted companies make stem from a lack of preparation. In fact, aggressors can be disarmed through a carefully executed preemptive strategy that includes:
- Conducting thorough and regular perception audits to evaluate how the market really sees a company;
- Ensuring the company’s vision and strategy are communicated clearly to all stakeholders;
- Identifying all potential threats and vulnerabilities by re-evaluating a company’s financials, structure and policies;
- Developing a comprehensive response plan to regain control of the agenda in the event of an attack; and
- Executing the basics better, including more sophisticated and interactive investor relations and regular dialogue with journalists, sell-side analysts and investors.
However aggrieved management teams may feel by an activist intervention, engaging in a constructive and polite dialogue privately and in public is imperative. The activist or short seller is likely to have spent hundreds of hours preparing their arguments. Simply dismissing their assertions with a standard threat of legal action is unlikely to dissuade them or pacify a nervous market. Neither is getting involved in a war of words. Instead, ensuring messages are positive, unemotional and consistent is a must. Finally, corporates need to understand the activist they are dealing with – their approach, style, track record and motivation, and how this information can be used to a corporate’s advantage when talking to the media and the market. Noble’s comments around the possible motives of Iceberg are a case in point.
While 80 percent1 of all activism remains focused in the US, and Asia is very much a nascent market, the winds of change are beginning to blow. Scrutiny of listed stocks has reached unprecedented levels as activists and short sellers turn up the heat, governments look to wheedle out corrupt practices, regulators put in place frameworks to improve standards and influential local media sit poised to enter the fray if activists engage them properly. The time has come for Asia corporates to seize the initiative.