Plush carpet, hushed tones. Few of us will ever get to walk the hallowed hallways of our biggest ASX companies.
From the outside, it looks like a world of privilege. Big salaries, company share options, and huge bonuses for those who make it to the top.
To those on the inside, though, it’s a very different story. For them, it’s relentless pressure to perform. If they don’t, they’ll soon be shuffled out the door.
Of course, it didn’t used to be like this. There were times when CEOs’ salaries seemed to only go up, even when the performance of their companies went down. It was this that so many investors found galling.
That was until the two-strikes rule reared its head. Under this rule, a company which has its remuneration report rejected by more than 25% of its shareholders at two successive AGMs, is in danger of a board spill.
If shareholders knock it back a second time, a spill vote is required. If 50% or more of the shareholders vote in favour, a full spill of the board has to occur within 90 days. As you can imagine, it’s something all directors want to avoid.
But it often doesn’t come to this. Being knocked back at the first AGM is often enough to put the wind up directors. What they’ll fear is another knockback at their next AGM.
It’s a tough balance to get right. If a CEO can add billions of dollars in value, shareholders will often consider a multimillion-dollar pay packet worthwhile.
But it’s a subjective argument. How much is the current CEO responsible for the performance…or are they riding the wave of decisions made before?
For a CEO and their board, the remuneration report at the AGM is just one hurdle to get over. But there are more hurdles to come.
Shareholders no longer idle
Not only are shareholders playing a bigger role in executive salaries, they want a bigger say in how companies are run.
This is no more apparent that what’s happening with our very own BHP Billiton Limited [ASX:BHP]. And that’s the point…our ‘very own’ BHP has large swathes of offshore investors. And some, like the multibillion hedge fund activist Elliott Management, are strongly pushing for change.
Go back a few months, and few, if any, of the BHP board members would have heard of Elliott Management. Now, they’ll be barely thinking about anything else.
As an activist investor, Elliott Management is pushing for some major upheaval. It wants BHP’s incoming chairperson to push out directors Elliott believes have been in their positions too long. Those directors that oversaw poor acquisitions and share buybacks at the top of the cycle.
Of course, Elliott wasn’t the first to make the call. Smaller fund managers have tried in the past to pressure BHP’s board, but didn’t get far at all.
While BHP initially dismissed Elliott’s first overtures, the board of BHP now understand that they’re in it for the long haul. Like other activist investors, Elliott is only interested in results.
In recent days, AMP Capital has entered the fray. It too wants to know what BHP will do with its shale oil assets, and is pressuring the board to lay out its plan.
What the action in BHP shows is that boards of public companies need to have their shareholders on side. A handful of large institutional investors can bandy together and push for changes in the board, and how management run a company.
It’s something CEOs of other public companies will be watching like a hawk. Especially if they’re a conglomerate with a broad range of businesses, or have a division that continues to underperform.
It’s all about returns
With BHP, it’s not a foregone conclusion that Elliott will win. However, what it does show is that capital is global, and that shareholders are no longer prepared to sit idle.
It’s all about generating returns. A traditional fund manager aims to invest in well-run companies operating in growing sectors. And in doing so, tries as best as it can to avoid companies it believes are poorly run, or are in contracting sectors.
Activist investors go the next step. Rather than avoiding companies they think are poorly run, they are happy to get their elbows out and aggressively push for change. Especially when they see a stock price trading below what they perceive to be fair value.
If they can get in and get the changes they want — like closing down or selling off underperforming assets — it’s a quick way for the stock to be re-rated and the activist investor to prosper.
The other interesting thing about the whole activist industry now is that passive managers — those that run index-hugging ETFs — are being pulled into the battle. With the massive growth in passive funds, ETFs are often among the largest shareholders.
Activist investors now need to pitch their plans to the passive funds, to see if they’ll get on board. Passive? Maybe not anymore.
What is clear is that boards can no longer take shareholders for granted. The board and management of a company are losing their grip at the top of the food chain. Shareholders want the value of their holdings to be fully realised. If not, they’ll look for management and boards than can.
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