Danone can stomach new activist investor – Breakingviews

Carol Ryan writes approvingly about a small stake by an activist investor in a previously entrenched French company:

Danone can stomach a new activist investor. A stake reportedly taken by U.S. hedge fund Corvex Management in the French yoghurt maker may be small, but would bring welcome pressure on management to meet its new margin target. Danone was once shielded from a Pepsi bid by the French state. If new investors bring good ideas and discipline, such defences won’t be necessary.

Keith Meister, the founder of Corvex and previous right-hand man of activist Carl Icahn, owns approximately 0.8 percent of Danone’s share capital, according to Bloomberg. The bite-size holding means Corvex is in no position to make aggressive demands, such as its ongoing attempt to derail a merger between chemicals groups Clariant and Huntsman.

Still, Meister’s arrival steps up pressure on Danone Chief Executive Emmanuel Faber to make the $53 billion dairy group more efficient….Some needling might be useful at a company that has previously disappointed investors with poor execution.

Danone has become emblematic of impregnable French companies ever since the French government scuppered reported interest from Pepsi back in 2005, making the yoghurt maker appear takeover-proof….

Were Corvex to bring useful ideas and discipline, it would make Danone more efficient, more profitable and more expensive to a would-be buyer. That’s a far more reliable form of takeover defence.

Source: Danone can stomach new activist investor – Breakingviews

Activism in Germany | Ethical Boardroom

Shareholder and hedge fund activism has become an influential force in German corporate life over the past 15 years or so, both in terms of corporate governance improvements and value creation, with approximately 400 campaigns launched by 100 (predominantly foreign) activist hedge funds against 200 of the country’s 650 public corporations.

Until recently, it was the threat of hostile takeovers that was deemed the principal corrective for poor management decisions and shareholder value destruction due to performance failures. Today, in Germany it has shifted to active monitoring by engaged or activist value minority investors – characterised by such an alignment of interests with and persuasion of fellow shareholders and institutional investors to generate support in the form of the requisite general shareholders’ meeting (AGM) majorities, if necessary. With 60 to 70 per cent (sometimes an even higher percentage) of the voting stock of leading German corporates owned by foreign institutional investors, this train of thought must be taken seriously.There are two significant factors that help contextualise activist campaigns and market acceptance of shareholder and hedge fund activism in the German corporate governance debate.

Firstly, 60 per cent of all 650 German publicly listed companies are controlled or dominated via share block ownership by families, founders, management teams, investors or holding companies. Thus only 250 German public companies lend themselves to the presumption that activism is dependent on a widely-held, dispersed shareholder ownership/population so that when negotiations with target management break down, the activist may resort to launching a confrontational proxy fight in order to replace some or all members of the supervisory board. They, in turn, may  recall the management and replace them with new managers who agree with  the activists’ strategic plan.Second, there is a certain consensus-oriented German corporate culture, etiquette and decorum that, over time, has demonstrated how publicity and accusatory campaigns against sitting management or supervisory board, proxy fights or resorting to litigation are by and large unsuccessful strategies, with only 20 per cent of all campaigns ever becoming public knowledge. There has only been one precedent (out of a total of seven attempts) where activists were capable of replacing the chairman of a supervisory board in an adversarial proxy fight – at pharmaceutical company Stada AG in August 2016.

In the view of many, the separation of ownership and control (Berle-Means) and the principal-agent problem (Jensen-Meckling) has recently led to sharp market cap drops and share price value-losses at the expense of shareholders in large DAX 30 German corporations and corporate groups, such as the utilities RWE and E.on, but also TUI, Commerzbank, Volkswagen and Deutsche Bank. It is no secret that concerned institutional investors have initiated discussions with activist hedge funds on these matters (see illustration opposite).

Observers believe that leading activist hedge funds, who acquire usually a minority position in the one to 10 per cent range (seldom more than 15 per cent total, depending on target size), could exert such additional monitoring function on behalf of all shareholders without necessarily destabilising the balance of powers between the AGM (shareholders), supervisory board and management board. First, they are not imposing their views on anybody, least of all management or the supervisory board, but seek to engage and present well-thought out alternative courses of action. Second, they have to win the votes and confidence of fellow shareholders and institutional investors in the first place in order to have any strategic impact.

So, to recap, there have been approximately 400 equity activist campaigns in the past 15 years or so in Germany, attaching to 200 public targets (out of a total of 650 listed companies), mostly hidden from the public.Further, assuming a base line of 400 campaigns, Thamm/Schiereck claim that 75 per cent of these samples have been kept under the lid and were never in the public limelight, on social media or mentioned in the press or legal/economic writings, reflecting the mainly informal approach take in these campaigns….

Interests and strategies of both activist hedge funds and German blockholders defy easy categorisation. Activists aim at creating value expressed in an increased share price of their portfolio companies. They employ intervention and campaigns built around some of the building blocks that we have presented. KUKA demonstrates that hedge funds may align themselves with blockholders to ride a rising stock price. On the other hand, German family blockholders may use activists to attract the interest of international institutional investors following the latter’s recommendations with the ultimate objective of boosting share value and selling their position – displacement through defection. Some activists adapt their strategies to the German context and demonstrate commitment to their portfolio companies, while German blockholders utilise activists to increase the value of their holdings, thus changing their preferences from commitment to liquidity.

Not unlike studies in the US, there are empirical findings in Germany that show there is considerable disciplinary power inhering in activist hedge funds. Virtually all listed companies in Germany (which have shrunk from about 1,000 to 650 in recent years) have an IR department now, monitoring closely their investor base. Many of them anticipate potential investments, interventions and engagements by activists and, in order to thwart campaigns, implement some of the typical activist demands, such as extra dividends, share buybacks or selling non-core divisions.

Source: Activism in Germany | Ethical Boardroom

Foreign investors to unite on Japanese corporate governance- Nikkei Asian Review

America’s biggest pension fund and three British asset management companies will work in lockstep on corporate governance reform in Japan by voting.

They will coordinate to request increasing outside directors from the at least two now recommended by the Tokyo Stock Exchange to at least one-third of the board. Companies that do not will be punished with votes against their choices for directors in principle….

The partners are the California Public Employees’ Retirement System, Legal & General Investment Management, Standard Life Investments and BMO Global Asset Management. Details of the group’s requests will be announced as soon as early next week.

The quartet collectively holds about 4 trillion yen ($36.3 billion) in Japanese stocks….Increasing outside directors will be a high hurdle for some companies. Just 40% of the Nikkei Stock Average’s 225 components have met the goal of at least one-third. But with collective engagement, the movement will likely gain momentum.

Source: Foreign investors to unite on Japanese corporate governance- Nikkei Asian Review

World’s biggest pension fund goes gender equal for the WIN – Financial News

Japan’s $1.2tn Government Pension Investment Fund is forging ahead with its gender equality drive, picking MSCI’s “Empowering Women” WIN index to benchmark its progress.

The giant fund has begun by shifting about 3% of its passive domestic equity investments, or around one trillion Japanese yen ($8.8bn), into index funds tracking three socially-responsible benchmarks, it said today.

One of these, MSCI’s Japan WIN index tracks companies that “encourage more women to enter or return to the workforce”. It ranks companies according to the gender balance of their new recruits, current workforce, senior management and executive board.

The other two indices it picked today – MSCI’s Environmental, Social and Governance Select Leaders and the FTSE Blossom Japan index – track Japanese firms that perform well on a more general social-responsibility agenda.

Source: World’s biggest pension fund goes gender equal for the WIN – Financial News

A Survey on Corporate Governance

Robert Purse reports on an international survey on corporate governance, concluding that respondents may support stronger standards and possibly a universal code of best practice:

Although 60% of respondents said ‘yes’, it is noteworthy that 40% responded either ‘no’, or ‘not sure’. Whilst we have no direct evidence to support the proposition, we are of the view that high standards of good governance should be self-evident with little room for uncertainty.

Source: A Survey on Corporate Governance

Japan’s ‘Show Me The Money’ Corporate Governance

John Vail writes in Forbes that improvements in Japanese corporate governance have led to increased profitability.

[W]hile increasing the number of independent directors and other recent governance issues are very important in the intermediate term for Japan, it is crucial for investors to understand that the profitability message has actually been understood by most Japanese corporates for over a decade. This is shown by the divergence in the profit margins from the trend in GDP growth in the charts above, showing that even though GDP growth has remained subdued, profit margins have surged.

Source: Japan’s ‘Show Me The Money’ Corporate Governance

The Amended Shareholders’ Rights Directive | Company Law and Corporate Governance

EU Directive 2017/828 has now been published in the Official Journal and will come into force in mid-June 2017, amending the Shareholders’ Rights Directive (SRD). Changes include:

Member States shall ensure that companies have the right to identify their shareholders, so companies will have the right to collect personal data on their shareholders “in order to enable the company to identify its existing shareholders in order to communicate with them directly with the view to facilitating the exercise of shareholder rights and shareholder engagement with the company.”

Institutional investors and asset managers must comply with two requirements, or publicly disclose a reasoned explanation as to why they have not complied: (i) institutional investors and asset managers shall develop and publicly disclose an engagement policy that describes how they integrate shareholder engagement into their investment strategy, and; (ii) institutional investors and asset managers shall, on an annual basis, publicly disclose how their engagement policy has been implemented.

Institutional investors public disclose how the main elements of their equity investment strategy are consistent with the profile and duration of their liabilities, in particular long-term liabilities, and how they contribute to medium to long-term performance of their assets.

Asset managers must disclose annually how their investment strategy and implementation contributes to the medium to long-term performance of the assets of the institutional investor or the fund.

Proxy advisors must have and disclose a code of conduct.

Shareholders have the right to vote on director pay.

Companies must disclose related party transactions.

Source: The Amended Shareholders’ Rights Directive | Company Law and Corporate Governance

Brazil: Vale minority shareholders nominate candidate to board | Reuters

Brazil’s mining company Vale SA on Wednesday said Aberdeen Asset Management PLC, on behalf of minority shareholders, nominated Isabella Saboya to join the company’s board.

Vale said in a securities filing that Sandra Guerra was also nominated by the minority shareholders as a substitute board member for Saboya in the election scheduled for April 20, 2017.

Source: Vale minority shareholders nominate candidate to board | Reuters

Peter Crow on Corporate Governance Developments in Europe and the UK

New Zealand corporate governance expert Peter Crow writes about corporate governance developments in continental Europe and the UK.

In Europe:

Whereas the focus in the past has been on ensuring management did its job well (an agency-based perspective), the boards and directors I spoke with indicated that they are starting to wrestle with the challenge of understanding the purpose of the company and how the value-creation mandate might be fulfilled. Several folk added that their usage of the term ‘corporate governance’ has changed, returning to the early usage: a descriptor for what boards (should) do when in session (i.e., in board meetings).

Related to the first point, boards in several European countries (well, in Belgium, Netherlands and Finland anyway) are starting to think more carefully about the longer-term implications of their decisions. This is in stark contrast to the short-termism that continues to pervade US and Canada boardroom and shareholder culture.

De Nederlandsche Bank (DNB, the Dutch Central Bank) is increasingly taking a formative view of supervision, expecting financial institutions to not only demonstrate compliance with established statutes and codes, but also to demonstrate how value is being added to the banking community and beyond in the future.Many people (both in public forums and private conversations) volunteered that diversity is important if boards are to make high quality decisions. However, the same people quickly added that their usage of the term meant diversity of thought, not gender or any other observable form of difference between group members. KPMG, IIA and people from several other Finnish agencies were very interested in the implications of the proposal that board involvement in strategy is good for both effective board practice and business performance. It seems that the findings from my doctoral research hit a spot, with both strong support and many questions about the mechanism-based model of corporate governance and the opportunity the model presents to help boards understand how influence can be exerted from the boardroom.

In the UK:

Director recruitment: The criticism levelled by many aspiring directors—that many board appointments are based primarily on prior relationships and not director competency or ‘fit’—remains rife in the UK. Despite a plethora of calls for more a robust process, the dominant question asked by many boards and nomination committees continues to be “Well, who do we know?”

Institutions: Directors’ and governance institutes (including the Institute of Directors and the ICSA: The Governance Institute) continue to promote themselves as champions of board performance and director professionalism, supported by a bevy of training courses, press releases and contributions to emergent practice. However, almost half of the directors that I spoke with (most of whom are members of at least one institution) have concerns over the direction and focus of directors’ institutes. They noted that institutions have become somewhat self-centred, losing sight of their stated purpose of serving the interests of members and promoting the profession. Remedial suggestions included holding directors accountable for performance and any acts of malfeasance (including de-badging miscreant members of their chartered status); moving the discourse away from populist topics to substantive matters; and, weaning boards off the notion that compliance with corporate governance codes is a valid measure of good performance.

Performance: The long-held understanding that the primary responsibility of the board of directors is to recruit the chief executive and to oversee management remains the dominant logic in the UK, especially in the publicly-listed company community. Whereas many commentators and directors (including me) promote a performance-based understanding (whereby the board commits to determining and pursuing a value-creation agenda) most boards remain comfortable limiting their contribution to monitoring and controlling the performance of their chief executive.

Board evaluations: Directors are increasingly aware of the emergent expectations of shareholders and other stakeholders; that a periodic assessment of board performance is appropriate. However, while directors’ institutes have for some time recommended that boards submit themselves to scrutiny, most directors that I spoke with indicated that they remain uncomfortable with formal external evaluations. Privately, they harbour concerns that the results may be used to expose poor practice and, potentially, be used to remove under-performing directors. Sadly, it seems that preservation (of income and status) remains the dominant logic for many directors.

Blueprint for Better Business: After spending a week-and-a-half delivering presentations, meeting with boards and fulfilling advisory engagements my last two days in the UK were spent at Murray Edwards College, Cambridge, at an immersion workshop run by the Blueprint for Better Business organisation. The motivation for attending was straightforward: to understand the organisation’s proposition more fully, especially to determine its applicability in practice. I came away convinced, to the extent that QuarryGroup will become a facilitator of the blueprint to businesses in Australia and New Zealand (at least) from 1 May onwards.

Source: Musings, the blog – Peter Crow

Directors must stand their ground with governance | Netwerk24

Thina Siwendu, Judge of the South African High Court: Gauteng local division was the guest speaker at an Africa Directors Programme (ADP) certificate award ceremony recently held in Johannesburg for the class of 2016. Her comments included:

Good corporate governance offers the ability to generate and create, to produce wealth and products. To solve human problems is one of the greatest human endeavours and is an incredible gift of humanity.“The danger to corporate governance is that it is sometimes still seen as an ‘after the fact process’, unrelated to the day to day being of corporate life. This lack of integration in thinking and behaviour has led to many instances of the slowing down of things, or just the ticking of boxes.“The separation between business, politics and the state has narrowed significantly. The common denominator is the constant distant demand for leadership.“Not just any leadership, but ethical, sound and courageous leadership. This is what we need in boardrooms.“In the context in which we operate, we have noticed a trust deficit and a challenge of a social contract that has collapsed.”

Source: Directors must stand their ground with governance | Netwerk24