Shareholder Activism

Asia - Cue for more engagement

Until recently, a combination of less mature capital markets and controlling positions in companies held by families have made Asia an unattractive place for US-style hedge fund activists to create returns.

Japan in particular has seen several high-profile US-style campaigns easily defeated, as a result of differences in corporate culture and governance structures.

However, recent moves by mainstream funds point to a changing landscape, where activists in Asia are increasingly portrayed as shareholder champions. Elliott Management’s 2015 campaign against Samsung, protesting the sale of its construction unit, was audacious, aiming right into the belly of the Korean business establishment. While the final vote sided with management, the activist took 30 percent of the tally.

Historically, activism in Asia has taken three primary forms. In the first, dissident management fights for control of an asset. The most extreme example is Chinese electrical appliance retailer Gome’s former chairman fighting a proxy contest from prison in an attempt to unseat the incumbent management.

In the second, small minorities of otherwise unconnected shareholders band together to block actions by the board. Hedge funds have played a role in these situations, helping drive outcomes in favor of minority shareholders.

The third form, short activism, is sometimes anonymous, but includes Muddy Waters’ high-profile attacks on companies such as Sino-Forest and Olam. US companies have also been attacked by short-sellers over their business practices in China, such as hedge funds that alleged Lumber Liquidators lied about formaldehyde levels in China-made flooring.

Such campaigns against Asian companies exploit a deep anxiety over information arbitrage. Foreign shareholders often have a shallow understanding of companies’ business practices. Transparency levels can also be low, helping fuel fears of unknown monsters swimming beneath the surface of a company’s results.

While activism in Asia does not yet compare to the US type that aims to drive significant structural change, companies long perceived as secure are becoming vulnerable, and complacency is dangerous. Asian companies need to be ready to fight an attack on their track record and values. The governance of family businesses, in Asia in particular, is less likely to be trusted and understood by the wider market. Boards need to be ready to show that they are aligned to the interests of all shareholders, instead of running businesses for themselves. To see off an activist threat, boards and key shareholders will need to engage investors more directly and clearly than they have had to do in the past.

Tim Payne is a Senior Partner and Head of Brunswick’s Asian business.

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