Activism in Asia has boomed in recent years, with companies in several countries increasingly forced to come to terms with pressure from investors. In the first half of 2017, 38 companies faced public demands by activist shareholders in the region, almost twice as many as in the same periods of 2013 and 2014. This follows record levels set in 2016, when 78 were targeted. Despite a widespread tendency among issuers to resist the change, they are increasingly forced to cave in and listen to shareholders.
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With the region’s stock markets recovering in the first half of 2017, the number of targets fell to 2015 levels, and the number of foreign activist funds launching new public campaigns dropped even further. Yet activism is far from losing momentum. New funds are being launched and investors are becoming more daring in pushing the boundaries of what can be demanded of boards and managers.
Statistics are likely to underestimate the activity in Asia as local cultures and disclosure requirements for shareholders are completely different from the U.S., where two-thirds of the companies facing public demands in the first half of 2017 were located, and where investors with stakes larger than 5% that intend to put pressure on boards or management must disclose their plans in a regulatory filing.
No such requirement is common in Asia, and institutional investors’ aversion to public spats ensures that most activism happens through behind-the-scenes negotiations, which elude the statistics. In fact, more than half of the shareholder demands at Asian companies tracked by Activist Insight Online in the first six months of 2017 were for changes to the composition or the organization of issuers’ boards. But speaking with investors operating in the region, it is evident that, in most Asian countries, demands for board changes are rare, and only used in extreme cases by the most daring activists.
More common are demands concerning capital allocation, as issuers tend to be conservatively managed, hoard cash, and are not comfortable dismissing underperforming legacy businesses. Poor investor relations, missed strategic opportunities, and opposition to lowball takeover bids are also frequent ingredients of Asian activism.
The increasing presence of foreign institutional investors in the region, combined with the influence of family offices of Asian businessmen willing to listen to activists invested in their portfolio companies is helping the surge. Several governments and regulators are also driving the change by promoting governance improvements and shareholder engagement, often through the introduction of stewardship codes modeled on the 2010 U.K. code.
Japan, where Prime Minister Shinzo Abe has been trying to use shareholder participation as a tool to revitalize the economy, has led the way and is now the busiest country in the region, with 17 companies facing public demands in the first half of 2017. Activity in South Korea is much less, but the country may be on the verge of radical change, with a new government elected earlier this year and advocates of shareholder activism appointed in key positions. After three years of agitation, Elliott Management broke new ground earlier this year, pushing Samsung Electronics, the flagship electronics company of the powerful South Korean conglomerate, to cancel treasury stock worth around $35 billion. The downfall of the country’s former president over corruption allegations linked to Samsung has hastened pressure for corporate reform.
Japanese Constructivism
An interview with Masaki Gotoh, chief investment officer at Misaki Capital.
We invest in companies with strong businesses and management teams and attempt to add value by engaging with management to increase the intrinsic value of the business. Strong business means a business with a sustainable competitive advantage while strong management team refers to senior management who are ‘Hungry for change,’ ‘Open to outside opinion,’ and have a ‘Public mindset’ or “HOP.”
Our engagement has two value drivers: the first (and common among most of our peers) is to address the reason for price discount to intrinsic value such as suboptimal capital allocation, or issues with companies’ balance sheets, communication, or governance issues. The second (and more unique to our team) is to increase the intrinsic value by helping increase free cash flows, focusing on the income statement and the cash flow statement. This value driver is possible to due to our engagement team, which is made up of ex-management consultants who have decades’ worth of experience with such projects.
The other unique characteristic of our organization is that its strategic partners are made up of established corporations and individuals from Japanese business and society. This helps not only in advancing the depth and speed of engagement, but also adds legitimacy to the eyes of our investee companies which we believe is vital to our method of engagement.
What are the most common forms of discount in Japan at the moment?
It is frequently noted that Japanese companies suffer from suboptimal balance sheets, which contribute to low returns on investment (represented by return on shareholders’ equity, or ROE). This is indeed true and why cash-rich companies are often targeted. However, this discount has shrunk rapidly since the Abe reforms began which, among other things, focused on Japan’s low corporate ROE. Since then, companies have begun to address their high cash hoards (albeit slowly) and have incorporated ROE targets in their mid-term plans, which was unusual prior to Abe-san.
However, our view is that the low ROE is driven less by the balance sheet, and more by the income statement. Our analysis shows that the reason for Japanese companies’ low ROE is less about its lack of leverage but more due to its low margins. And this is not due to its high corporate tax rate and is just as pronounced on an operating level. Therefore, our second value driver attempts to address the low margins in Japan.
Read the full article here by Activist Insight
