Shareholders can find a potent ally in activist funds
THE so-called shareholder spring – in which shareholders have been revolting against the pay of chief executives of major corporations like Barclays, Aviva, and William Hill – is gaining momentum. And activist hedge funds, which pressure public companies to make changes to improve a company’s share price, will increasingly drive this phenomenon. Many regard hedge funds as self-serving “vultures” – but this stereotype is being overturned.
Activist funds, a common phenomenon in the US, are spilling over to the UK. Along with private and institutional investors, activist funds are increasingly getting involved to try and improve shareholder returns, curb excessive pay and add their representatives to boards of directors.
Europe’s largest activist fund, Swedish-based Cevian Capital, has been active in Britain and successful in improving shareholder returns. Cevian built a stake in Cookson Group, the British industrial materials supplier, before almost a third of shareholders revolted against excessive executive pay proposals for 2012. The Children’s Investment Fund Management (TCI) is a London based hedge fund known for its shareholder activism. Most recently, TCI has been a major shareholder of Deutsche Borse, the German Stock Exchange, where it forced the resignation of its chief executive, who refused to abandon his plan to take over the London Stock Exchange.
The recent successes of activist hedge funds in the US in changing the management of companies – spearheaded by activist investors like Carl Icahn, Bill Ackman, Dan Loeb and Nelson Peltz – demonstrates that positive changes can be carried out without more government interventions. In most cases, intervention by hedge funds result in management changes, representation in the board, reduced chief executive pay, better share performance and dividends, as well as an increased chance of emerging from Chapter 11 bankruptcy.
In the past, corporations with a market capitalisation of $100bn (£64.3bn) or more had the power to ignore calls from activist funds. Not anymore. They are now responding quickly to any fund that holds below one per cent of their shares.
Some of the US government’s new regulation has been successful in empowering shareholders to vote on executive pay. US shareholders are now in a position to regulate major corporations and, for a change, have public opinion on their side. It is not clear to what extent shareholders in the UK will be as effective as those in the US in curbing executive pay. British chief executives are likely to be spared an annual vote on their bonus and pay – more likely it will be only every three years. These are early days for activist funds in the UK.
Gil Shidlo is an academic who has worked at international organisations. He contributes to various London School of Economics publications.