Thursday, August 17, 2006

Shareholder activism 2 comments

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Minority shareholders have always been treated as rank outsiders in the power hierarchy of a listed company. Not just in Asia, but also in the West, which has a long tradition of equity ownership. It is only after the scandals during the first years of the new millenium (Enron, for example) that shareholders in the US have been flexing their muscles and forming coalitions with like-minded investors or acting through their mutual fund companies to bring up proposals to the management at AGMs, with issues ranging from limits on chief executive officer pay (the most common proposal) to nondiscrimination policies that include sexual orientation. See the article link to CorpWatch in the US for more information.

In a typically non-confrontational, tripartite-driven Asian society like Singapore, many will be averse to the idea of shareholder activism, from the top down to the minority shareholders themselves. The tradition has been to place faith in the management to do the right thing, and given that growth in the past has not been driven by common equity, but by government funding, debt and foreign investment, it is understandable that company management will pay less attention to minority retail investors. The active lobbying and questioning is typically "outsourced" to the brokerage analysts at separate analyst briefings while AGMs tend to be insipid affairs with little shareholder participation (see my article on "The value of AGMs"). So both sides generally don't appear to be interested in interacting with each other, save for the same old regulars (retiree brokers etc).

The fact is that the stakeholders within a company are driven by different objectives. Shareholders will be driven by profits and will want to maximise the economic value of the firm; if the owners are also the managers, they will tend to manage with the same objective of maximising shareholder wealth. However, agency problems arise when the managers are non-substantial shareholders, because their managerial goals may diverge; for example they may seek non-accretive acquisitions to increase their power and prestige. Even manager-main shareholders could take advantage of minority shareholders through inter-related party transactions (something the Indonesians were famous for) to siphon funds from the listed company to their own 100%-owned private arms. If minority shareholders don't look out for themselves and speak out when needed, they will end up being the ones sustaining these so-called agency costs.

A lot of such minority shareholder inaction has to do with lack of knowledge, both of regulations as well as implications of corporate moves. Generally most retail investors don't go further into the financial statements beyond the P&L statement, and don't pick out things like management remuneration, revised aggressive depreciation policies, related-party transactions etc, all of which could constitute grounds for further questioning. There was some confusion over the Pacific Century episode, where firstly it was unclear whether the concurrent offer by private equity firms still stood, and secondly over the rather cheap buyout of PCCW's telco assets by a China-affliated investor. The general offer by OCBC for the rest of Great Eastern also triggered some confusion over listing validity and shareholder options should they reject the offer. These two episodes were highlighted by the press, otherwise they would have remained in the dark. In the absence of clear-cut alternative options, retail investors tend to take the path offered by company management, out of fear (of being left out).

The most well-known shareholder activist organisation in Singapore would be SIAS, the Securities Investors Association of Singapore. Formed in the aftermath of the Malaysia CLOB debacle, its charter is to represent the interests of the retail minority investor. However, monetary support from the investor population it aims to fight for has been weak, and in the end it has had to resort to sponsorship from Singapore GLCs as well as providing their own in-house stock research services to support its staff.

The most visible symbol of shareholder activism in Singapore in recent years has probably been Oei Hong Leong, and his prime target, Natsteel. His sometimes incongruous positions notwithstanding(eg. why oppose the recently proposed change of Natsteel's name?), he has been able to extract value for all Natsteel shareholders, including himself, through aggressive posturing at company AGMs, and he is now pushing for cash-rich Natsteel to either do a cash distribution to shareholders or find a new business quickly, following its divestment of its steel business. This is a good example of how shareholder activism can keep management on their toes, and to highlight to the managers what are the priority issues important to shareholders.

Activism brings to the mind of management scary images of confrontational individuals dragging the whole decision-making process into the mud, and they point to cases in the US where corporate sharks with no interest in the core business acquire stakes in order to strip the assets; sometimes they acquire large stakes and then force the target company to repurchase the stock at a substantial premium to prevent a takeover, a process known as greenmail. While noting that Singapore shareholder sophistication is nowhere near there, it could also be argued that with the exception of interference with strategic decision-making, the above shareholder-driven moves bring as much benefit to minority shareholders (through unlocking of value) as they damage management interests.... and who owns the company, ultimately? A more active shareholder community facilitates greater interaction and communication with the management, tends to drive an appreciation for better-quality stock research, and ultimately creates a shareholder community at greater ease with their stock holdings and hence more ready to take a longer-term buy-and-hold investment horizon/approach (instead of the wheeling-dealing we see on the markets predominantly, in part driven by an inherent distrust/perceived ignorance of company prospects/direction). When shareholders actively ferret out information on the company and surface them to other investors or to management, the end result will be a more efficient market that prices in the inherent risks ..... and ultimately higher trading liquidity and higher valuations over the long-term.




Anonymous Anonymous said...

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5/09/2008 4:09 AM  

Its about time

1/14/2014 10:35 AM  

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