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Activist shareholders raise their heads once again

Shareholder activism could help rather than hinder company stewardship

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Paul Mumford, senior asset manager at Cavendish Asset Management, is the kind of institutional investor that chief financial officers and their boards could be hearing a lot more of in the years ahead.

Mumford is the kind activist shareholder who believes in voting the company's shares and kicking up a fuss in the media when he believes an investee company is making a mistake. Mumford was one of the most critical voices in the summer of 2010 when Prudential Assurance made its abortive £24 billion bid for Asian insurer AIA.

Earlier this year, Mumford complained that construction company Costain wanted to pay too much for Mouchel in a deal which eventually fell through. And this autumn, he was one of the critics that forced Rami Cassis, chief executive of AIM-listed specialist IT company Parseq, to raise his offer in a private-equity backed management buyout.

"We're very conscientious about having a vote on every single issue that comes across our desk, even if we decide not to cast the vote,"Mumford says.

Shareholders are more eager to flex their muscles than ever before. "It seems that investors are more risk adverse to large takeovers than they used to be," says David Paterson, head of corporate governance at the National Association of Pension Funds (NAPF), which speaks for assets valued at £800 billion managed for 1,200 pension schemes. "There is less appetite for game-changing transactions than there was a few years ago."

"Some of the big investment institutions have recalibrated their approach in the wake of the financial crisis," adds Tom Powdrill of Pensions Investment Research Consultants (PIRC).

"There's a general sense that they need to improve their act. When the tide goes out, you can see who's swimming naked."

The increase in shareholder activism could well be partly linked to the publication of the Financial Reporting Council's Stewardship Code in 2010. This sets out a number of principles institutional investors should follow when they are managing their investments.

All of the Britain's big UK asset management houses have signed up to the new set of principles along with a handful of foreign houses.

"The code has focused investors' minds on issues which they were familiar with but which they were perhaps not addressing so directly as they should do," Paterson says. "There's pressure on the asset managers, who are responsible for the day-to-day activity to be seen to be doing more."

Growing activism

"The Stewardship Code is starting to bite a bit," agrees Powdrill. "If we want to avoid a tilt to a more regulatory approach to governance in the UK, then we have to make shareholder oversight work more effectively." But that will require effort on both sides – from investors and companies.

Generally, over the last five to 10 years, companies have got better at regarding shareholder engagement as being legitimate and being open to talking to shareholders about issues of potential concern," Powdrill says.

So CFOs and boards should prepare themselves for closer scrutiny, especially when it comes to voting on resolutions put before shareholders.

At Cavendish Asset Management, which has £700 million of funds under management, voting decisions are passed to fund manages by the firm's custodian, Northern Trust. "Each fund manager has to make a decision on the issues," says Mumford.


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