Henri Eliot: Why are NZ shareholders so passive?
9:30 AM Friday Mar 28, 2014
Companies are holding more cash than ever on their balance sheets, and activists want them to give it back to shareholders, says Henri Eliot.
Almost two years ago, the board of British bank Barclays was told that it was “a disgrace to capitalism”. The directors of insurance giant Aviva were also accused of being “more concerned about their remuneration packages than growing our business”.
That was the beginning in 2012 for Britain of the Shareholder Spring (named after the spring round of annual shareholders’ meetings). These events and others have offered great challenges for boardrooms in the UK and US.
Today, activists are more likely to be chasing dividends or share repurchases than cost-cutting measures. Private shareholders such as Carl Icahn in the case of Apple have provided great entertainment where he recently tried to force the Apple board to buy back $50 billion worth of its own shares to boost the share price. He even used twitter to update his followers in tweeting a favorable comment following a meeting with Apple CEO Tim Cook.
At the end of 2013, Apple had $160 billion in cash reserves. Apple won the war but Icahn put up a brave fight. As a serial activist he won a small battle in the end, as Apple did buy back $14 billion worth of its own shares. A former corporate raider was now a hero according to local media.
The main reason is the most obvious one: Companies are holding more cash than ever on their balance sheets, and activists want them to give it back to shareholders.
Why are we more passive in New Zealand? Is it due to our higher level of trust in our company CEO’s and boards? Are we happy with their decisions in growing shareholder value?
PwC New Zealand CEO and Senior Partner Bruce Hassall says, “It is interesting how most shareholders in New Zealand are relatively passive, compared to other countries. This could be down to the way we conduct business here and the level’s of trust more generally of the business community by investors in New Zealand. We have a different cultural and business approach, haven’t we? This doesn’t mean investors don’t pay attention to their investments and company activities.
Rob Campbell, a professional director and investor adds, “I guess the first point is that the overwhelming majority of investors in every market are passive at least in the sense that their money is in funds managed by others. Again in every market the great majority of funds are index or “closet” index funds in some sense or another.” [Closet index funds means an actively managed fund that closely mimics the volatility and performance of an index fund].
According to Rob, “The New Zealand market has very few activists since the prime of Ron Brierley. Some fund managers do rattle the cage of under performing companies and I came into my current role at GPG as a result of such rattling by a group of fund managers. The same applies to my role at a Tourism Holdings. We do have some strongly opinionated fund managers, Brian Gaynor and Chris Swasbrook spring to mind, which is useful in the market. My guess is that we will see more, there are some temptingly plump pigeons in the bush.”
From my personal experience most AGM’s are poorly attended and often a great opportunity to have free morning tea. Should we be breaking down the barriers for shareholders subjecting company management to frank and public questioning at the annual general meeting?
The question is and has always been whether shareholder activism is a good thing. People like Icahn would argue yes – according to him, “most corporate boards are made up of lackeys to the CEO, people who typically don’t make great investment decisions and shouldn’t be entrusted with spare cash.” Others simply argue that if a company has run out of productive places to put investment capital, then why not give it back to shareholders?
There’s no question that the share buybacks and dividend payments pushed for by activists boost stock prices in the short term. But as many economists in the US have been arguing for the last several years, there’s never been a better time for companies to do big capital investment projects. With reasonably low interest rates, it’s been a great time to borrow money. Of course this holds true until the cheap money disappears.
According to the Boston Consulting Group, they have recently reported that “a strong, properly compensated management team and governance that adds value are critical to making good on a company’s investment thesis. For managers, it’s necessary to have effective metrics, transparent performance assessment, and meaningful rewards that are linked to sustained value creation over both the short and long term.”
We all get those shrink-wrapped proxy ballots in our letterbox. We all know it’s a pain to look at them, one-by-one. But check them out and pay attention. Make sure your company’s executives are always focused, first and foremost, on the creation of value. After all, that’s the definition of shareholder activism.
Henri Eliot is CEO of Board Dynamics