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Activists to increase pressure on UK’s “country club boards”

Activist investors are increasingly likely to put pressure on closely-knit “country club boards” in UK companies, two activist investors told the audience at the Mergermarket Corporate Development Summit in London this week.

Country club boards refer to boards populated by directors who, although they may be accomplished in business, may have reached their position through connections rather than sector expertise.

The conference panellists, including both investors and advisors, sought to explain how and why US-based activist investors were now taking large positions in UK-listed companies.

Investors often pursue a more active approach in the UK due to the high level of minority shareholder rights, said Liad Meidar from activist investor Gatemore Capital - a London-based fund run by an American.

Other reasons investors might target UK companies include the value opportunities that may occur as a result of volatility linked to macroeconomic or political sentiment, Meidar added.

Furthermore, under MiFiD II, the EU investment protection rules introduced in 2018, banks and brokers are required to charge investors separately for investment research. In the small cap space, this has led to lower levels of analyst coverage and understanding in the marketplace, thus creating greater volatility in response to news events and providing opportunities to invest in good companies at attractive prices, Meidar added.

Gatemore has undertaken recent public activism campaigns in companies such as Majestic Wine [LON:WINE], Wincanton [LON:WIN] and DX Group [LON:DX].

The UK has seen a long list of US investors target London-listed companies, from ValueAct Capital’s stakes in Rolls-Royce [LON:RR] and Merlin Entertainments [LON:MERL] to Elliott Management’s successful campaign to force Whitbread [LON:WTB] sell its Costa Coffee business. Recent cases include Trian Partners building a stake in UK plumbing company Ferguson [LON:FERG], and Coast Capital demanding transportation company FirstGroup [LON:FGP] change six of its 11 board members.

In Europe, activists have typically undertaken a more patient approach and often waited to voice their concerns at the next AGM, but this is changing -- as US-style activism has offered a more aggressive approach which has been supported by other shareholders, said Rich Thomas, a head of European Shareholder Advisory at Lazard.

Some shareholders can choose a “constructive approach” to activism, said Andrew Birse from AllianceBernstein, who said he takes this approach in managing his European Equities portfolio.

Constructive investors tend to engage with a company directly rather than in public, offering their opinions on strategic, management and structural changes, he said.

“Such investors are not shy of offering a new perspective to management if they see a company failing to optimise their cost of equity, which we feel is often neglected”, Birse said. This often results in suggestions around corporate structure, capital allocation and M&A strategy, he added.

If accomplished board members lack the necessary industry expertise to challenge the strategy and management, shareholders can put pressure to make boards “fit for purpose” and to respond to their concerns, Thomas said.

Also, if a company lacks productive and value-creation focused communication with shareholders, activists are more likely to hijack the company’s strategic narrative and demand action on their own terms, he added.

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