Boards bite back as activist investors face expensive showdowns  

Procter & Gamble CEO David Taylor answers questions at a news conference following P&G's shareholder vote, Tuesday, Oct. 10, 2017, in Cincinnati. Initial voting results show Procter & Gamble successfully fending off an attempt by activist investor Nelson Peltz to capture a seat on its board
Procter & Gamble CEO David Taylor answers questions at a news conference following P&G's shareholder vote, Tuesday, Oct. 10, 2017, in Cincinnati. Initial voting results show Procter & Gamble successfully fending off an attempt by activist investor Nelson Peltz to capture a seat on its board

Aggressive shareholder activism is the new normal in corporate governance. Get used to it. 

That was the message received by the London Stock Exchange (LSE) last month after City grandee Sir Simon Robertson tried to defuse a row between the exchange and one its largest shareholders.

The almighty battle between the LSE and Sir Christopher Hohn, who runs The Children’s Investment Fund (TCI), has been one of the most high-profile ever to take place in the City. TCI, which owns 5pc of the exchange, wants chairman Donald Brydon to go over his handling of chief executive Xavier Rolet’s exit, but the board has stood firm in its belief that Brydon should stay and Rolet leave.

After Sir Simon was left with the like-it-or-lump-it message from the activist investor, the mud-slinging continued. Rolet was forced to leave a year earlier than planned, Sir Christopher published a scathing dossier on Brydon and the board accused TCI of damaging the company. Both sides have been racing to whip up support ahead of a crunch vote on Brydon’s future this week, with the odds looking increasingly in the LSE’s favour.

If this is a new age in corporate governance, with investors trying to shakeup businesses that are performing well but haven’t quite followed their rulebook, then the LSE’s directors are unwilling to accept it. 

Billionaire hedge fund manager Sir Christopher Hohn wants chairman Donald Brydon to step down over his handling of chief executive Xavier Rolet's departure, but it is looking increasingly likely that investors will vote against that motion.
Billionaire hedge fund manager Sir Christopher Hohn wants chairman Donald Brydon to step down over his handling of chief executive Xavier Rolet's departure, but it is looking increasingly likely that investors will vote against that motion. 

But it is not just the British bourse biting back. Showdowns involving big business and shareholders this year have sprung from some of the world’s largest companies including mining giant BHP Billiton, consumer goods titan Procter & Gamble, footwear behemoth Deckers, paint maker Azko Nobel and payroll giant ADP. 

According to Lazard, $45bn (£33.7bn) was spent on activist campaigns in the year to October – almost double the spend for the whole of 2016 despite the number of campaigns set to be the same. A fifth was also targeted at European companies, up from just 10pc in previous years, with businesses such as Clariant and Nestle also targeted.  It is the “willingness to fight back” that has stood out this year as activists go for bigger and better-resourced businesses, Lazard said.

The LSE, as an example, not only has deep pockets and close contacts but also the resources to prepare for all eventualities, with sources saying the board pulled together three different dossiers for shareholders depending on three potential outcomes. One report outlining the problems with Rolet’s management style was never released. 

While the row between the LSE and TCI has been unusual, so much so that sources say TCI have dubbed the row their first “anti-activist campaign” because it differs from the traditional tactic of going for poor performance, Lazard Europe’s chief operating officer Alexandra Soto says there is a wider theme at play – boards are getting more sophisticated in how they defend themselves. 

“Their responses are more bespoke,” she notes.

“[That’s] reflective of a deeper understanding of their own vulnerabilities, the quality of the activists’ arguments and of their shareholders’ expectations. As a result, the process of deciding whether to fight or settle has become more informed and sophisticated – smarter, in our opinion.”

ADP's boss Carlos Rodriguez called hedge fund owner Bill Ackman's failure to land any seats on the payroll company's board an "ass-whipping" - months after he likened the activist investor to a "spoiled brat" in a television interview.   
ADP's boss Carlos Rodriguez called hedge fund owner Bill Ackman's failure to land any seats on the payroll company's board an "ass-whipping" last month

Each board will still take a different approach. The new chairman of BHP grabbed the opportunity at his first shareholder meeting in October to take a swipe at activist investor Elliott Advisors, which has been trying to shake up its board, refuting suggestions that chief executive Andrew Mackenzie was running out of time in the job as “false”. Others are more direct. Last month Carlos Rodriguez, ADP’s boss, called hedge fund owner Bill Ackman’s failure to land any seats on the payroll company’s board an “ass-whipping”, laying into his defeat months after he likened the activist investor to a “spoiled brat”. 

When Marcato Capital Management last week failed to win any board seats on Deckers’ board after a 10-month battle, Deckers said simply that the outcome “reaffirms that we are on the right track”.

Some battles have had surprising twists and turns, with Procter & Gamble claiming victory in October after activist investor Nelson Peltz failed to win a seat on its board before another count of votes came to the opposite conclusion. And the largest proxy fight in US history may not be over after the company suggested it might still challenge the result.  It is these lengthy battles that both sides are usually keen to avoid, aware that by the end neither will come out completely unscathed. 

While most company bosses acknowledge that activists have a key role to play, a senior executive who has been on the receiving end of one said he’d like to see formal rules put in place so that feuds don’t roll on endlessly. City investors disagreed, however, with one saying even when an activist fails the business often improves. 

“Even where the company wins the close vote, the result is a major change in strategy or management, or both,” adds Martin Lipton, a founder of Wachtell, Lipton, Rosen & Katz which advises on shareholder attacks.

“I expect activism to continue at the current pace despite efforts to mitigate short-termism and activism.” 

If Sir Christopher loses in his battle with the LSE this week it will stand in sharp contrast to his last high-profile campaign involving an exchange in 2005.

He succeeded in blocking Deutsche Boerse’s takeover of the LSE and ousting then chief executive Werner Seifert with such force that the Swiss businessman published a memoir of the experience titled Invasion of the Locusts. The hedge fund and its supporters are unlikely, however, to step away quietly this time. 

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