Why activist investors are turning up the heat in Asia

No longer "corporate raiders", activists are increasingly looking to opportunities to add value by bringing old-fashioned companies into the modern era. In Asia, there's no shortage of targets.

Once regarded as a niche strategy in the US and Europe, shareholder activism has shed its "corporate raider" tag as it increasingly takes hold in Asia.

Asia accounted for 31% of non-US activist activity in 2017, up from just 11% in 2011, with local players increasingly playing an active role alongside the better-known international firms, according to a new JP Morgan report, Shareholder Activism in Asia, published on Monday.

Asia is dominated by companies that are often tightly held by the founding family, for example South Korea’s chaebols, and shareholder activists are turning their attentions to such traditionally managed companies when previously they had shied away. 
 
In fact, according to David Hunker, author of the JP Morgan report, the very reasons Asian companies may have previously stayed under activists' radar now offer an opportunity to unlock value.

“Complex ownership structures, such as cross-shareholding, government participation and family control no longer insulate corporations, but are now targets of criticism by activists and issues for investors to rally around,” Hunker said.

Take Hyundai for example. It came under fire in April from US-based Elliott Management, which announced it had bought a 1.5% stake in Hyundai Motor Company, Hyundai Mobis Co. and Kia Motors Corporation. Elliott urged the group to adopt a whole host of reforms, including reducing excess cash via capital return and improving the board structure by adding more independent directors, among other suggestions.

When Hyundai responded with a restructuring plan in early April, Elliott created a new website  outlining its suggestions in a 43-page document. Hyundai has yet to comment or act on Elliott’s proposals.

And what activists like Elliott are doing - essentially seeking to shake up companies held back by old-fashioned styles of management - is in line with the goals of regulators keen to raise corporate governance standards.

OVERSIGHT ESSENTIAL

Regulators around the region have also been examining reforms to bring their jurisdictions in line with international best practices in corporate governance and investor engagement.

Korea and Japan have led the way, issuing codes of best practice of corporate governance in 2016 and 2015 respectively.

Hong Kong and Singapore have published consultation papers in the last six months addressing revisions in their respective corporate governance codes, and Taiwan has implemented its Stewardship Principles for Institutional Investors coupled with a 2017 directive that all companies must have at least two independent directors and 20% board independence.

However, recent changes to listing rules in Hong Kong pinpoint a potential loophole in investor protection. The recent introduction of dual-class shares poses a threat to minority shareholders, with the introduction of weighted voting rights (WVR) structures. Such structures, popular with fast-growing start-ups in sectors like technology, typically allow founders or early investors to maintain control of the company even after selling most of the shares.

Singapore too is currently exploring changing its listing rules to allow dual-class shares, in a scramble amongst exchanges to attract the new wave of technology companies emerging in Asia that are looking to go public.

Amongst other concerns, under WVR structures it is unlikely minority shareholders will be able to exercise their rights effectively. Board directors, often appointed by the founders holding superior voting rights, are more likely to side with the people who appointed them than act in the interests of minority shareholders, the Hong Kong Investment Funds Association warned in January.

Increasingly institutional investors are siding with the activists and speaking out about the corporate compliance risks. According to Blackrock’s fourth quarter Investment Stewardship Report for Asia Pacific, of 8,390 proposals that it voted on in three months it voted against the management in 7% of cases.

As such, the 'Greed is Good' era when investor activism was associated with making a fast buck by stripping companies for parts with little regard for their long-term viability is far behind us.

Hanker puts it like this: “As activists continue to shed the label of 'corporate raiders' and are increasingly perceived as 'engaged owners', support for their value creation theses will rise."

And Asia is shaping up to be the next big battleground.

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