Shareholder Activism – good governance and shareholder value

Our next speaker is Gabrielle Rasminski, CEO and Managing Director at Cendent Capital.

Gabrielle has been involved in the financial services sector for over 25 years.

Today, he'll give us an introduction to shareholder activism.

Welcome to the presentation, Gabrielle.

Thanks, Angelina.

So look, thanks for the opportunity and what I'd like to do over the next few minutes is just give everyone a broad introduction to shareholder activism.

I'll just key through.

Here's a disclaimer.

Here's a little snapshot about who we are and what we do.

So we've been around since 2008, we're in our 15th year of managing a number of activist funds.

And for those of you who might be interested, you can see in the top left hand corner, there's a quote there from someone who we would consider probably the grandfather of activism, and that's Ben Graham.

well known as a value investor and the teacher of Warren Buffett.

But Graham, in his own right, was an activist investor in the 1920s and the 1930s.

In terms of an introduction to activism, I think it's worth noting that despite the fact that a lot of people may not be aware of what it is in Australia, we actually have a really, really solid framework for shareholder rights.

The framework we operate under

is very different to the way it is in other parts of the world.

We describe it as very shareholder friendly.

Other jurisdictions, for example, in the United States, have things like staggered board, poison pills and a whole lot of other structures and practices that really disenfranchise shareholders and their rights.

Whereas here, Corporations Act primarily enshrines all of the rights that shareholders add.

And things like the takeovers panel, for example, are used to arbitrate on matters of corporate control.

So unlike in other jurisdictions where challenges to the way companies operate and shareholder rights generally are conducted in the courts of law, in Australia, it's really conducted in the court of shareholder opinion.

For example, in terms of the rights that shareholders in Australia might have is if you have or together with others can muster 5% of a company, you've actually got the right to call a general meeting to propose resolutions, including resolutions that might seek to appoint or remove directors at general meetings.

It's also worth understanding that those rights as shareholders are very limited in that they don't allow the shareholders to run the company.

It's really the board that gets to run the company.

Shareholders ultimately get to pick who the board is and who makes those decisions.

One of the other unique features of Australian corporate regulation is the two strikes rule, which was enacted to deal with

with what a lot of people consider to be egregious remuneration practices, but has now become a way of shareholders expressing very clear views on not only remuneration, but companies more generally.

The other thing that is particularly interesting about the two strikes regulation is that it's a minority threshold.

That is, you only need 25% of shareholders voting

to actually get a strike.

And if you have two strikes in a row or two strikes sequentially, boards actually have to go to a spill.

So it's a really powerful tool for shareholders to communicate publicly with boards about what they think about a company.

If I think about the evolution of activism, it's important to remember it's a tool.

What's the tool used for?

It's ultimately to do with value.

Companies that become interesting to activist investors or who raise the ire of their investors more generally are the companies that tend to underperform, the companies who destroy value, and companies who generally over a period of time fail to meet the expectations of their shareholders.

All of those become potential targets for dissatisfied shareholders.

Trying to understand why that happens is really important because that leads us to the tools that we use.

Principal agent conflict, that is boards and management there as agents of the shareholders, the principals, is the root cause of a lot of the problems.

And it's that conflict between the interests of the two that lead to value discrepancies, mispricings.

In the US, for example, there's an expression called the Wall Street walk, which is how a lot of shareholders will express their dissatisfaction or displeasure with a company.

And that is they sell their shares.

Could be a slight variation where they might be underweight the shares of a company if they're managing a portfolio that tracks an index.

But ultimately, that's typically been the response of shareholders around the world when they don't like something, which is to get out.

What we see the evolution of activism being is an extension of instead of selling, simply moving to say, well, actually, we're gonna try and change things.

We're not happy with that status quo.

And so we're going to see if we can't make it different.

It's worth noting here also a bit of the terminology that's used with respect to shareholder rights and shareholder activism.

We make a very big distinction between advocacy

and activism.

In Australia, a lot of fund managers do really well at advocacy, and that is where they will take every opportunity that they have to engage with companies to tell them what they think, to tell them sometimes they're doing a great job or sometimes that they're not doing such a great job, but also to make suggestions on what they might do.

That's advocacy in our book.

Activism is what happens once advocacy has run its course and it can't go any further.

Very few investors are prepared to conduct activist campaigns.

There are some accidental or occasional activists where a manager who typically engages in advocacy sometimes goes to the point of wanting to conduct a more aggressive activist campaign.

But there are very few investors who are prepared, either because of the time requirements or the skill set, who are prepared to actually conduct genuine activist campaigns across their entire portfolios.

One of the biggest challenges that faces any shareholder looking to change the status quo is inertia, because if you can't overcome investors' inertia or the fact that most investors would simply do that Wall Street walk I referred to, you can't actually get change.

If I think about what the key attributes of success are at a general level with activism, this might be a bit pithy, but it's worth thinking of the Archimedean principle where if you have a lever long enough and a fulcrum, you can actually move the world.

And so what we're describing on this slide is simply that in our experience, if you can muster some of these factors, including expertise in what you do experience, some people have got a lot of experience.

We've got over 40 campaigns.

over the last 15 years and importantly empathy, which is where you can actually put yourself in the shoes of other shareholders and investors.

Those together combine to give credibility and if you're prepared to collaborate and communicate with other shareholders, you actually build influence and that influence is ultimately what allows you to lengthen the lever

and move the fulcrum closer to the objective that you have.

And I've got a picture of the world, but ultimately we're talking of the companies.

That to us is the secret of success in a good activist campaign.

And that's to leverage the ideas that you have beyond your own economic interest.

This is another way of thinking about what I talked about on that slide just previously.

And that's a comparison of advocacy

which is typically bilateral, where it's one to one.

One investor or one investor group speaking to one board.

Multilateral, one to many is what we call activism, is where a shareholder will not only try and speak to a board and the management team, but also to other shareholders.

And in doing so, what they're attempting to do is leverage a common ground amongst shareholders to persuade boards that they actually need to change.

We're of the view that over many years of experience of our own, but also looking at other people's experiences, when boards are faced with an overwhelming view from shareholders, they tend to bend to the will of the majority of shareholders.

Whereas if it's simply one shareholder advocating for their position, boards are often able to just bat them off and ignore what they're suggesting or requesting.

Here's a slide that just illustrates the spectrum of engagement that we follow.

As I said, we've had a long history of doing this and implementing the campaigns.

And to the left hand side where you describe or where we describe letters to the board, that's really that advocacy.

It's about bilateral discussions with a company setting out perhaps some suggestions on what they might do better or highlighting things that are being done that are poor.

and creating that discrepancy, that mispricing and undervaluation.

And as you move through that spectrum of engagement, you move to public multilateral engagement with other shareholders, which can ultimately end up in a proxy contest where you've decided that the board needs to change because they're not prepared to.

Opportunities that you often will target are varied.

There's not one size fits all in terms of solutions for the problems companies face.

Therefore, you have to be able to adapt.

But the techniques that you apply have often got lots of similarities.

And the point I made before I just reiterate is that a really successful activist needs to be able to leverage their investment thesis beyond whatever they might own in a company.

It's not about being simply the biggest shareholder swinging the biggest stick.

It's about having the best idea that other shareholders can get behind and support.

So in terms of what I've talked about before, it's probably worth talking about the who, the how and the why.

So ultimately we're value investors.

So we look to identify underpriced and mispriced securities that are traded on the stock exchange.

And what we find is that those are typically mispriced or undervalued for a reason.

And that's where the activism comes in.

We do very deep fundamental research

on our investments, and that's what helps us devise the alternative to the status quo.

And that's also what helps us gain influence and build consensus with other shareholders.

Ultimately, other shareholders aren't going to decide to support us because they like us or because we think it's a cool idea.

They're going to do it after having themselves done deep research to judge and to validate whether what we propose is actually viable and in their interests.

We've got years and years of experience at Sanding Capital of doing this, of building that consensus and working out how to unlock value.

And the way we approach things is that each individual company in each situation is different, yet it allows us to apply proven and repeatable methods to each and every engagement, no matter how different they are.

What we particularly like about our approach is that because we're buying undervalued and mispriced securities and we have ideas on how that can change, what allows us to do from an investment perspective is deliver returns that over the years have actually had low correlations with market returns because they're highly idiosyncratic returns.

And ultimately, it's about getting a return for the shareholders.

If we can

devise solutions and changes to companies that are in the interests of other shareholders, not just ours.

It actually allows us to get more successful outcomes with a greater reliability, increased probability of success.

And ultimately, we're trying to achieve that.

I guess it's a holy grail, but that alignment of interests where it's not shareholders versus board and management, but it's shareholders and board and management working to try and get better outcomes.

I've just picked out three of our past campaigns.

Well, actually one of them is still current, but just to illustrate how we approach this.

And the three that I've picked are A to B, which was a taxi company that was rich with property assets.

Another one on the other side of the page is iLuca and De Terra.

And that's a company where we identified that there was a particular asset that was growing within the original iLuka business that didn't fit in, that as it grew would not fit in with iLuka.

And that we ran a campaign to demerge that, and that was successful.

And then Magellan, which is in the middle, is one of our current campaigns.

One of the common themes amongst all of these is that we were able to identify a mispricing and an undervaluation

But as well, we're able to identify and propose alternative ways of approaching the situation.

Basically, sometimes setting different goals for the company or proposing different goals and other times having different strategies to achieve those goals.

But in each case,

we were able to leverage the ideas that we had that we were proposing to gain widespread support amongst the shareholder base.

And that was the key ingredient to the success that we've had in those investments.

Here's just a brief summary of the performance of our fund since inception.

I'll let people read it at their leisure.

But it basically, ultimately, there's no point doing what we do if it doesn't ultimately lead to better returns for our investors.

So we'd like to think that this track record actually bears that out.

Thanks very much for the opportunity.

Thank you for your presentation, Gabriel.

Do you have time for a few questions?

Sure.

What are the common misunderstandings or misinterpretation of activist investing?

Oh, OK. That's a good question.

I think there's a few problems right now that we face in terms of misunderstanding.

And I guess one of the big ones is the misconception between shareholder or investment activism, which is what we do, and social activism, where

environmental groups or social issues groups will take aim at companies for issues that they consider important.

Ours is very much ultimately about shareholder return.

It doesn't mean that they have to be at odds with environmental or social or governance issues.

In fact, we actually think that governance has to be the primary driver of everything.

But that's often one of the misconceptions.

I think the other one is that what you see us do publicly

is usually the final outcome of a long private campaign.

So you can't just judge what you see publicly.

You've got to consider that there might've actually been a lot of work that led to that point, which also caused us to go public.

What are the repeatable aspects of your investment strategy and campaign approach that support your success?

Well, I think I mentioned it earlier.

One of them is obviously the

the diligence and the detail with which we approach our investment analysis.

Keep in mind, ultimately, it's about making, trying to identify and make investments that we consider to be materially undervalued and mispriced.

But where there is an opportunity for us to change the status quo to either enhance that value or bridge that value gap.

And in terms of bridging that value gap, finding issues that are

that other investors can get behind and support that will improve the situation, I think is one of those repeatable skills.

We've got a long track record of being able to convince other shareholders to support what we propose.

Thank you, Gabrielle.

Thanks, Angelina.