03/09/2014 - 05:10

The emergence of activist boards

03/09/2014 - 05:10


Save articles for future reference.

The boards of some major US and Australian companies have responded to shareholder activism by becoming more active in their pursuit of best practice.

The emergence of activist boards
MARKET RATE: Activist investors are often more concerned with short-term performance than long-term strategy.

As if company directors did not have enough to worry about, they can now add to their list of concerns the threat of being summarily dismissed from their roles by activist shareholders.Not only can they be pushed aside, the company they have nurtured (and perhaps heavily invested in) may be taken in an entirely different direction after they depart.

Like never before in Australia the topic of activist investors is gaining wide press coverage. Once an exclusively American occurrence, it has reached our shore and is here to stay.

Law firm Clayton Utz has nominated 2014 as the 'year of the activist investor' and rolls out the firm's itinerary for defending its client boards. Meanwhile, Global Proxy Solicitation has reported an Australian record eight board spills were announced in January of 2014.

To understand what is happening you must look at what or who is driving the activism. Once upon a time it was hedge funds or corporate raiders who sought to take over underperforming firms, strip their assets and liquidate them for a quick profit. Under the guidance of canny lawyers, such defenses as 'poison pills' or 'classified boards' could ward off these attacks.

The new activist investor is more likely to be an institutional investor such as a pension fund, whose goals will be very different. It can be dissatisfaction with self-serving governance or poor communication to shareholders – but it is more likely to be concern about performance.

Companies whose results drop below the average of their peers are likely to find activist shareholders knocking. The goal of these investors is simply to get a better return on their investment and they start by replacing the board with a more capable one.

Our two-strikes rule in Australia makes this easy. This means that if 25 per cent or more of the votes cast are not in favour of the board's remuneration report at two successive AGMs, then shareholders must vote on whether to spill all board positions. Such was the case when Bankers Trust got the chairman and two directors booted from David Jones.

Isn't this a good thing? After all, better performance is what everyone wants. Well, not exactly, because these institutions have widely differing interpretations of performance. Some funds want short-term results and will sacrifice long-term business building strategies. Others want the opposite.

As former General Electric CEO Jack Welch famously said: "Short-term gain is easy and long-term gain is easy, but great managers do both." So boards that want the best thing for their company should be taking action to get both of these kinds of value creation.

Activist boards

Somerville & Partners' research into what boards are doing to become more active uncovered several US (Boeing, Ford, DuPont and P&G) and Australian (Brambles, ANZ, Caltex and Westfield) examples, which leads to a recommendation that boards become more active in pursuing the following four best practices.

• Enhancing performance. Directors and executives are collaborating in the creation of balanced scorecards, which include leading as well as lag indicators of performance. Directors bring experience and expertise from their own firms in creating performance management tools that allow early interventions to protect target performance.

• Developing leadership capability. Boards are adding value here by conducting CEO succession planning and establishing a development system that ensures good leadership at every level.

Providing expert resources. High-capability directors able to provide specialist advice to the business relevant to the strategy are seen as a driver of business effectiveness. This includes diversity in discipline, industry and gender. Directors are increasingly selected based on their experience in areas relevant to the current strategy along with expertise and experience to run the key board committees.

• Guiding strategic direction. This means supporting the CEO in development of strategy, communicating with stakeholders, scanning the environment for threat or opportunity, and assisting the strategic planning process. The greatest value add here is in working with the executive team drawing on their own experience of best practice and benchmarks to help build the knowledge and skills required to execute the strategy

While taking care not to muddle the role of the board with that of the CEO, activist boards are realising that they represent a significant untapped talent pool for a firm and are taking a new stance in guiding and driving performance, and thereby retaining control of the business.


Jack Somerville

Somerville & Partners

Senior partner



Subscription Options