Monday, 26 May 2014

Intermediation, diversification, transparency and takeovers

The Pfizer bid for Astrazeneca now looks dead. But it's worth picking over some of the details. In particular, I'm fascinated by the behaviour of some asset managers after the Astrazeneca board rejected the bid. Unusually, some managers backed the board, but it is also clear that others - AXA, BlackRock, Jupiter, L&G and Schroders for instance - did not.

Let's be clear what happened here. The board considered the Pfizer bid, assessed what it thought were the prospects for the business continuing on its own, and rejected it. In doing so, the board could have drawn on the tweaked guidance in the Takeover Code, which says:

In particular, when giving its opinion, the board of the offeree company is not required by the Code to consider the offer price as the determining factor and is not precluded by the Code from taking into account any other factors which it considers relevant. 

So the board is able to take a slightly broader view than simply "is this a good price?"

Now a quick diversion, into diversification. The asset management lobby has often argued in the past that it shouldn't be expected to second guess company decision making. Which is why we shouldn't blame asset managers for failing to spot the risks the banks were running pre-crisis. And this is why they diversify, because they can't really know what is going on inside companies. Here, for example, is what the IMA told the Treasury select committee in 2009.
Although shareholder approval is required for major corporate actions they do not set strategy nor are they insiders, in that they only have access to information that is available to the market as a whole. Managers compensate for such information asymmetries by diversifying portfolio construction.
For what it's worth, I think this is pretty accurate. The whole point if diversification is to reduce risk. But I also think the inevitable result is that it reduces focus on individual companies. And of course one group of asset managers - the big passive houses - are massively diversified. For the bulk of their assets they don't make active investment decisions. They hold a large position in company X because company X is a constituent of index Y, not because of an assessment of its future prospects.

We now know that both BlackRock and Legal & General have been urging Astrazeneca to talk to Pfizer (though, to be clear, in the former case they apparently back the board's rejection of £55 a share). Given their greatly diversified holdings, and the fact that their large positions in Astrazeneca are not an active investment decision, I personally don't think we can ascribe any great insight into the prospects of the company if taken over or not. So I think we can probably conclude that they are simply focusing on the immediate gain.

So, in practical terms, whatever the Takeover Code says major asset managers will encourage boards facing a bid to focus on short-term price, rather than long-term prospects. This is not very surprising, but it is important. And it should also put some of the recent blah about short-termism into context.

Another aspect of asset manager pressure on Astrazeneca that seems to have gone without comment is the fact they are intermediaries. There will be pension funds whose capital is being used to try and push Astrazeneca back to the negotiating table. But I would put money on it that those clients are completely unaware that this is occurring. It just struck me, too, that the Stewardship Code is silent on the issue of takeovers, despite this surely being a pretty fundamental aspect of shareholders' interaction with companies.

In this particular case, I think the Astrazeneca board should publish all the correspondence it has received from shareholders. But perhaps in future asset managers should be required to disclose to their clients if they are lobbying a board - either way - on the outcome of a bid. We don't see that many cases like Astrazeneca to make this an onerous requirement. And it would encourage accountability within the investment chain.

Finally, some of the commentary around the bid is noteworthy, Martin Wolf's piece in the FT was particularly interesting. There is a loss of faith in the idea that markets alone should determine the ownership of major businesses. When you think about it, this is pretty significant. Whatever you might think about the rights of "owners", their ability to decide on a transfer in ownership ought to be considered pretty fundamental. But the implication in much commentary around this bid is that they may not be best placed to makes that decision. This is surely rather a big deal. On the one hand this looks like a further shift away from shareholder primacy. But on the other it also underlines that share ownership does matter (and therefore so does the behaviour of shareholders). If shareholders only own shares, not companies, why does it matter who they sell them too?

Thursday, 22 May 2014

Albert Hirschman quote for election day

This comes from Shifting Involvements: Private Interest and Public Action, and seems pretty relevant today
[A]t some stage in our cycle, the benefit of collective action for an individual is not the difference between the hoped-for result and the effort furnished by him and her, but the sum of these two magnitudes! And a further surprising consequence follows immediately: since the output and objective of collective action are ordinarily a public good available to all, the only way in which an individual can raise the benefit accruing to him from the collective action is by stepping up his own input, his effort on behalf of the public policy he espouses. Far from shirking and attempting to free ride, a truly maximising individual will attempt to be as activist as he can manage, within the limits set by his other essential activities and objectives.

Tuesday, 20 May 2014

Labour and capital at National Express

As some people will be aware, there was a shareholder resolution filed at the National Express AGM last week. This was the culmination of long-running complaints about anti-union activity in the company's US schoolbus business Durham. The resolution made pretty modest requests -  give responsibility for oversight of human capital strategy to a board committee, adopt a workplace rights policy based on recognised global standards, and report to shareholders on implementation.

The resolution received a vote of almost 13% in favour plus abstentions taking the total to 15%. But remember too that the Cosmen family have a fair chunk of National Express shares. Once you take this into account the votes in favour plus abstentions are getting close to 20%. That's pretty impressive, especially when most shareholder resolutions on environmental and social issues fail to get a vote in favour that makes it into double figures.

A good result all round.

Friday, 16 May 2014

Official executive pay shareholder revolt terminology

As we're in AGM season I thought I'd do a short note to help people writing about voting results on executive pay issues choose the correct description for a given outcome.

I start from the point that a vote of less than 10% should not really be reported, except perhaps if you really need to talk it up, in which case anything 8%+ could at a pinch be tagged as a "minor revolt".

When thinking about which cliche to deploy, bear in mind the metaphorical content employed. My rough guideline is that, if you're using the typical 'physical violence' metaphors, you have three basic choices - near physical contact, mild physical pain, severe physical pain. There are also some different options when we look at actual defeats.

So let's get started.

As I said, at a pinch, if you must write about a sub 10% vote against, you should use "minor revolt"

For votes of over 10% but less than 20%, my suggestion is to use a "near miss" physical metaphor, so the official tag here should be "a shot across the bows" or "a warning shot"

When we move into votes of over 20% but less than 30% we can imply real physical contact, but only mild pain. So the correct terminology should "a rap across the knuckles" or, perhaps if at the lower end of the range, "a slap on the wrist". If you want to add a bit of colour (literally) then the result could leave the company "looking red-faced".

When we get into the territory of votes over 30% against but short of a defeat, then severe physical pain should be suggested. Wherever possible, votes of this scale should be described as "a bloody nose". Again, to build on the original cliche, try to think of a pun related to the nature of the company. For example a poor result for a transport company can be a "car crash".

Also with votes of this scale you may want to describe them as "a message", "a clear message" or even "a strong signal" to the board, just to give it a little more weight.

Actual defeats are a special case. All defeats should be described as "hugely embarrassing" for the company. They are also "a strong message", but in this case one which "the board must listen to" or which "the board cannot ignore". The defeat can also be described as "damaging" and can be said to have "left the company reeling".

Finally, if the defeat is not the first one in the season then a further bit of work is required. If this is the second or third actual defeat then it can be described as part of "a wave of shareholder revolts". You might also want to describe the wave as "looking like it might turn into a second shareholder spring".

If the defeat is the sixth in the season, you may officially describe the events in totality as "a second shareholder spring". A larger number of defeats (more than six on the main market) should be described as "a revolution". This is important, as in 2012 unfortunately City AM erroneously described "the wave of shareholder revolts" as "revolution" whereas technically it only merited a "shareholder spring".