Rising Shareholder Activism shifts spotlight to Boards

Shareholder activism is on the rise and Asia is emerging as a growing focus. Asian family-owned and founder-led businesses as well as the region’s many diversified conglomerates, in particular, should expect increased scrutiny. There are red flags and lessons to be learnt from past cases on how to prepare for and best respond to activist campaigns.

Shareholder activists, both homegrown and international, are increasingly finding attractive targets among Asian corporates as they scrutinise listed companies around the world for opportunities to boost shareholder returns and build their own profile as insightful and muscular investors.

Board directors will find themselves centre stage in the event of an activist approach. A failure to spot the warning signs, or to ensure an appropriate –
and prompt – board response to activist concerns, can destroy individual reputations as well as company value.

This article analyses recent activist campaigns to identify the red flags that can indicate vulnerability to activist attack. It also sets out key questions board directors should keep under regular review to make sure the companies they oversee minimise the risk of an activist investor attack and respond effectively in the event a campaign is launched.

Gaining momentum According to JP Morgan, in its report on Shareholder Activism in Asia: Confrontation Gaining Momentum (May 2018), 106 of 662 new global activism campaigns were launched in Asia in 2017 (see chart below, “Shareholder Activism Campaigns in Asia”). This represents almost one-third (31 per cent) of non-US activism activity, up from 12 per cent in 2011. 

Board directors in the US quickly learnt from the wave of hostile mergers and acquisitions (M&As) of the 1980s and 1990s that the best defence is the defence that is never fought. Hostile predators are most effectively kept at bay by ensuring that the value of the business is fully reflected in the company’s share price.

The same applies in relation to activism. Board directors need to routinely look at the businesses they oversee through the eyes of an activist investor. They need to know the business well enough to spot potential vulnerabilities. They need to ask executive management tough questions about the forward strategy and implications of emerging threats and opportunities, rather than focus on past performance.

And if the board is contacted by an activist, the response needs to be timely and appropriate. A delayed response, or one that fails to acknowledge justified shareholder concerns, will add to perceptions that the board may be complacent or failing adequately to oversee the executive team.

If this is the case, the chairman and/or independent directors can expect to find themselves in the crosshairs of any subsequent campaign.

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This article first appeared in the Q2 2019 Issue of the SID Directors Bulletin published by the Singapore Institute of Directors.