On the quiet
Activist investors are sometimes a colourful breed. One of them was the now infamous Florian Homm, who fell from grace in September 2007 in spectacular style.
Corporate Germany resented the free-wheeling, profit-seeking approach of the likes of Homm, which could not be further removed from the niceties and conventions of post-war Rhineland capitalism.
But Homm saw himself as the scourge of “dilettante” boards and “adventurous mismanagement” and a force for good both for the corporate world and other investors. In one interview he mocked institutional investors for not seeing through the lies of corporate executives, and said they would be better off by hiring private investigators to find out what they are really up to.
How activist do pension investors need to be? Certainly, institutional investor activism has its critics; Susan Combs, Texas comptroller of public accounts with responsibility for state pensions, believes there is little evidence that activist investing improves shareholder returns, and argues that it may be counter-productive.
But a Columbia Business School research paper (The Long-Term Effects of Hedge Fund Activism, July 2013) looked at the performance of 2,000 activist interventions from 1994-2007, finding improved operating performance in the five years following the intervention.
Current institutional investor best practice states that engagement is best undertaken confidentially if it is to be successful. Rather than name and shame the subjects of its engagement, the US pension fund CalPERS has since 2010 adopted a policy of behind-the-scenes intervention, going public only where circumstances dictate.
The latest review of the “CalPERS Effect” on target companies, published in September 2013 and conducted by Wilshire Associates, measured the performance of 183 companies targeted by CalPERS from 1999-2012. For the three years prior to engagement the stocks lagged the Russell 1000 index by 38.9% on a cumulative basis. In the five years after the engagement the stocks outperformed the index by a cumulative 13.7%.
In Europe, the Dutch Eumedion corporate governance forum will prove a useful model for the UK investor forum that was proposed in the 2012 Kay Report on the public equity market. December saw the publication of the first report of the Collective Engagement Working Group, an initiative directly inspired by the Kay Report.
Ongoing dialogue will be at the heart of the UK forum’s activity, and the working group’s report proposes that companies should have an annual strategy meeting with investors, excluding brokers and analysts. The report also highlights institutional investors’ obligations to examine their own practices and to ensure that their interests are aligned with those of their managers.
While its day-to-day activities will need to be undertaken behind the scenes, the forum will need to prove to the wider constituency of pension fund beneficiaries, sponsors and policy makers as well as company boards and other institutional shareholders, that collective engagement is a constructive force that benefits all concerned. The working group should start to think now about how it will go about proving the success of its work. That needs hard data, and a credible, independent research partner to conduct the necessary analysis.
There is no evidence to suggest that collective engagement will be any less effective than case-by-case activity by investors working alone. On that basis, the UK working group should have an interesting story to tell in due course. It might even serve as a template for other countries.