Some caricatures on a chess board

Shareholder activism – is it always personal?

Are you surprised  by the defensive response of Premier Foods to the activist shareholder Oasis suggestion that the CEO should go? Isn’t this simply an attempt to engage the more ‘passive’ investors in key decisions about leadership and good governance in the run up to the 18 July AGM?

Oasis, like most activists, has done its homework and concluded that the business is under-performing. Yes it is a Hong Kong based hedge fund seeking to turn-around the business, but that is what hedge funds do. To quote the website Investopedia: ‘A hedge fund is basically a fancy name for an investment partnership ….its purpose is to maximize investor returns and eliminate risk.’ In this case the risk is the CEO who they see as a liability hampering growth.

Oasis has had a representative on the board for the past two years. It has invested in building up a shareholding of almost 10% to make it the largest single shareholder, it definitely has ‘skin in the game’. It wants to replace the CEO with the FD on an interim basis while seeking a new leader. The current Chair at Premier says Oasis offers ‘no constructive solution’ and urges shareholders to back the reappointment of the CEO at the AGM on 18 July. it is now a question of confidence in the CEO.

Boards are understandably wary of activist shareholders, being disruptors and agents of change. Activist shareholders identify businesses where they believe assets are poorly leveraged and shareholder return could be better. Invariably this leads to questions of competence and governance, which ultimately comes down to confidence in leadership. A Chair will typically back his/her own CEO against an outsider, this is predictable. What is not predictable is which way the passive shareholders will jump when this is put to a vote.

An  activist shareholder has in effect claimed that ‘the emperor has no clothes’ and is asking the remaining shareholders to recognise this. Many of these ‘inactive’ shareholders are less engaged for a variety of reasons, this causes institutional investors much discomfort as can be seen by the actions of pension fund trustees who wrote to the pensions regulator concerned at the Oasis calls for the dismissal of the Premier Foods CEO.

Critics of activist shareholders and hedge funds will say they are predatory asset strippers, who just want to make a killing, however they see value that is not being released.  Their message to other shareholders is that they have the answer to unlocking this value which the incumbent board does not or it would already have done so. Shareholders have a choice at the AGM:  either support the activist, support the current board or follow the advice of proxy voting agencies.  Boards often scramble for last minute investor sentiment analysis to see which way the wind is blowing.

What does the intervention of an activist really signify? It is not really about personalities but about perceptions. The way that risk is seen by the board will be as a threat to be mitigated, but the way risk is seen by an activist will be as an opportunity to be exploited.  In the governance & compliance driven culture of boards today, caution triumphs and horizons are short. Activists are much more risk-savvy than the average board and see risk differently. For Oasis the greater risk in Premier Foods is reappointing  the current CEO, they believe shareholder returns will be improved if he is removed.

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