Shareholders who refuse to stay quiet in the face of an underperforming share price are on the increase - making life hell for UK management.
Few chairmen could be better placed than Tony Greener at Guinness to talk about what it is like living with an active investor on your shareholder register. 'Corporate hell,' would no doubt sum it up quite nicely.
Bernard Arnault, chairman of French drinks group LVMH and a substantial shareholder and non-executive director of Guinness, has made life exceedingly difficult for Greener since he announced his planned £24 billion merger with Grand Metropolitan in May.
The Frenchman did not like the idea one bit, rejecting it vociferously in public, putting forward his own plans and buying shares in Grand Metropolitan to increase his investor power. Fair enough, you may think. But well before the merger plan came to light, Arnault had become a thorn in Greener's side: a disgruntled shareholder who refused to sit back and stay quiet in the face of Guinness' underperforming share price.
While Arnault is also a trading partner with Guinness, as a dissatisfied investor the tactics he uses are typical of an increasingly prevalent variety of shareholder taking stakes in British companies: the active investor.
Arnault had tried to press for a demerger of Guinness' brewing interests behind closed doors but without success. By results time last year, the malcontent had had enough of doing it the British way. He went public, calling the Sunday press to breakfast meetings at London's Savoy, venting his anger and airing his demerger plan. By Monday the Guinness share price was on the move; daily papers picked up the story and analysts scuttled back to their desks to do the sums on a demerger.
For Greener, the damage was done: the investment community had been given a very public reminder that Guinness had underperformed the FTSE All Share Index by 35% over the previous five years. Even the most sympathetic fund manager now wanted action.
A breed more common in the US, active investors come in all guises and are rarely welcome news for management. Their most visible form are the 'active funds' which buy into underperforming situations and seek to increase performance using a range of often controversial techniques. A prime example of this species is Hong Kong-based Regent Pacific Group, which is currently trying to force the break-up of ailing Hambros (see p42).
Then there are the corporate raiders, high-profile individuals who buy stakes, take seats on the board and wield influence from within. And there are the traditional fund managers, who - under ever more pressure themselves to perform - are increasingly busy behind closed doors, devising and pushing through corporate change.
UK Active Value (UKAV), an investment fund worth around £200 million and run by Julian Treger and Brian Myerson, is the public tip of the active investor iceberg in Britain. Variously dubbed as raiders, buccaneers, cowboys, or as one analyst put it, 'I keep their number filed under B for bastards', the duo set up their first and main fund in 1993 and have used it to take stakes in companies like Signet, Scholl, Kenwood, Greycoat and Hogg Robinson.
Their investment formula goes like this: buy a stake in an underperforming business; call for radical corporate change such as 'the chief executive must go', or, as in the case of property firm Greycoat, 'put yourself up for sale'; leak this to a Sunday newspaper; get other shareholders on side and once you have the required 10%, call an EGM and force a vote on your proposals.
'My heart sank when I saw them appear on our shareholder register,' says the head of one company in which UKAV holds a stake and who did not want to be identified. 'I thought, this is going to be trouble and waste a lot of time. They don't care how they go about things; they buy shares at x and want to see them get to y and will try and get there by any means.'
Lord Chadlington, chairman of international PR firm Shandwick, has lived with the duo on his shareholder register since 1994 when his share price was around 14p. Since then the investment has paid off handsomely with the shares now at around 40p. 'They are continually coming up with ideas and you have to be prepared to fight back and respond, not just sit there and say thanks a lot, we'll think about it, bye,' he says. 'I haven't always enjoyed it; relationships with active investors aren't always enjoyable but they can be fruitful.'
He says keeping active investors informed, without making them insiders, can be difficult. Management should also remember that these people are investors, not management consultants. 'You must not lose responsibility for the management of the company, and keep the interests of all shareholders in mind.'
Coming up with ideas is one face of the active investor: the Mr Nice Guy. But if your performance falls off, you can expect to receive a visit from Mr Nasty.
Tim Beech, formerly managing director of Kenwood Appliances in which UKAV has a 9.3% stake, was ousted earlier this year from his job as a result of the fund's high-profile campaign against him. Treger and Myerson bought into Kenwood last year at an average 'in' price of 211p, later increasing their stakes at 180p and 150p. The first the Kenwood management heard of their investor's dissatisfaction was a Sunday newspaper story in which the fund accused the company of 'lacking highly rated management with marketing flair'. Later the pair convened a shareholder meeting and called for the company to be put up for sale. Even though the motion was defeated, Beech was gone within a month.
Assessing whether such high-profile tactics pay off for UKAV is difficult because the funds are based in the British Virgin Islands which means getting performance information is impossible. The pair say their main fund has seen compound growth rates of 23% since it started and some investments, like Shandwick, have paid off. But the share price of others like Kenwood and Hogg Robinson still languish well below the purchase price.
While UKAV is not alone in adopting high-profile tactics - witness Regent Pacific's strong-arm tactics against Hambros - other active funds, like Scottish Value Management, the fund management business, prefer to keep their demands out of the limelight when possible. The firm's Scottish Value Trust hunts out undervalued rivals in which to invest. Managing director Colin McLean explains: 'We are focused on taking large stakes in individual investment trusts and we like to see what encouragement we can give to the board to improve performance. That can involve a look at how a trust is marketed or structured, but we don't send out press releases. We find it more effective to write to a company chairman and put over our point of view. You arrive as a catalyst, a focus for change.
The danger of taking a high-profile stance is that there is not always a way forward; it can close doors and we want to go on being active over the long term.'
But for active investor pressure to be effective, it does not necessarily have to be high-profile. One recent example is Martin Ebner, the maverick Swiss investor who owns and runs BZ Group, the Zurich investment business.
Ebner built up a 25% stake in insurance group Winterthur between January and August. He wanted to see the group merge with bank Credit Suisse.
To precipitate events, Ebner sent out a circular to his investors and other interested parties in which he outlined three options for the insurance group's future. Either he would buy a majority stake, or Winterthur would merge with Credit Suisse, or Winterthur would look for an overseas partner.
It was effectively an ultimatum to the boards of both companies who were already in discussions. Within days, Ebner's second option became a reality and Credit Suisse bought the business for £5.8 billion, netting Ebner a nice return on his investment in the process.
Kurt Schiltknecht, president of BZ Trust, says that when the company first started operating in the '80s, it was often used as 'the ugly boy' behind whom larger institutions more aligned to the establishment could take refuge. 'Living in a small country like Switzerland, some of them found it difficult telling management what to do,' he says. 'We take a medium-term view. We are good shareholders, but if you're showing a lousy performance and there are no signs of change, then maybe it's not so pleasant to have us as shareholders.'
Luke Johnson is a shareholder and non-executive director of Pizza Express and an investor behind several private-to-public deals like GiroVend, the vending service group and My Kinda Town, the themed restaurant business.
He and a group of co-investors buy into private businesses together, restructure them and take them public. 'We are not interested in taking small stakes,' he says. 'We have to have around a third of the equity to make it worthwhile and look for seats on the board. I play a more active role than a typical non-executive because I'm solely interested in shareholder returns and not salary. We don't just invest in shares then sit back; we try and add value through suggesting acquisitions, disposals and maybe changes in management.'
However, he is fervently opposed to buying into a business and then launching a high-profile hostile campaign to oust management. 'It's a very difficult and messy situation to be in. People want to keep their jobs, they have service contracts and even if they have failed you can end up having to pay them a lot. Conflict in the public arena is very time-consuming, exhausting and wasteful.'
But ousting management is not always engineered in a high-profile fashion; active investors can be more subtle than that. When he recently took over control of a quoted shell, one active investor told the incumbent chief executive to go and scour the market for media acquisitions which he duly did. However, having presented numerous options which got nowhere, it was clear to him that the controlling shareholder had no intention of pursuing any of his ideas. Eventually the chief executive left out of pure frustration.
Meanwhile patience is also running out in the more-established quarters of Britain's investment community. Even fund managers traditionally supportive of management, like M&G, the Prudential and PDFM, are becoming twitchy with companies that are not delivering. Not least because index-linked funds that rely on computers to determine which stocks to invest in are outperforming them.
While they will never admit it on the record, fund managers - quietly and discreetly - are increasingly instigating mergers, acquisitions, takeovers and management changes. The City grapevine suggested that Mercury Asset Management was the catalyst to Granada's takeover of Forte last year; that PDFM used its stake in castings group William Cook to incite a take-over approach from Triplex Lloyd. PDFM is also known to have suggested the takeover in April of housebuilder Raine by construction group Alfred McAlpine; the fund manager had substantial stakes in both companies.
None of these funds has a policy to be active, but will wield their influence in the face of underperformance. David Herro, the Chicago fund manager whose name is synonymous with the high-profile ousting of Maurice Saatchi from the advertising group now known as Cordiant, has over $400 million invested in UK equities. He says being active is not part of his investment strategy. 'We invest in companies that don't need tweaking,' he says.
'There are times when management may ask, or we may offer suggestions on issues, or when we may write letters to the management. Cordiant was the exception. There were board members and management members who asked us to do something because they didn't have the clout. I would do the exact same thing again.'
Fund manager M&G has gone as far as creating a new position to help ensure it is getting a good deal out of its investments. Merchant banker Trelawny Williams holds the title 'head of corporate analysis', which is an anodyne way of saying he keeps a beady eye on under-performers and is involved in deciding what to do about them. The first public evidence that M&G would take a more active involvement in its investments came in December when it lost patience with the poor performance at Birmingham hardware maker Newman Tonks. M&G shocked the company's management by throwing the weight of its 11% stake behind a hostile approach from engineering firm FKI. Enough was clearly enough.
As a check against complacent management, active investors can be welcome news for other shareholders. But as seekers of short-term share-price hikes or quick-fix solutions, they are a potentially damaging distraction to management. The one certainty is that British business is likely to see more of them, not less.
'Does it focus your mind having an active investor on your shareholder register?' says one Signet insider who knows what it means to have Treger and Myerson on board. 'It shouldn't do because your fiduciary duty is to all shareholders, but I suppose the answer is yes.'
Amanda Hall is a City reporter for the Sunday Telegraph.
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