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Activism versus constructivism

The US activist hedge fund manager Elliott Management is once again in the press, this time regarding its stake in the engineering firm Arconic. The hedge fund manager’s persistence in pushing for the replacement of Arconic’s CEO, Klaus Kleinfeld, finally yielded results, although probably not for the reasons one would think. Kleinfeld’s unwise response was to write a personal letter to Elliott’s founder, Paul Singer. This was then shared with the company’s board, who found its contents to be unacceptable.

In the US, historically there has been very little dialogue between company management and shareholders. For a shareholder to have influence over corporate strategy or to unlock the value of the shares they hold in the company, a more aggressive ‘activist’ strategy has often proved necessary. This kind of activism is very much at odds with European investment culture, where there has traditionally been an open dialogue between company management and their shareholders.

So is shareholder activism useful for the investment community in general, and specifically for the European market? To discover the answer, we first have to define what is meant by activism.

There is a vast range of activist investment approaches, spanning the spectrum from those who pursue hostile actions (as perceived by the companies they own) to active investors who seek to work with corporate boards in a constructive and cooperative way. Perhaps we can frame this contrast in approaches as activism versus constructivism.

In either case, investors aim to unlock shareholder value by influencing corporate strategy (encouraging a firm to access a different market, or to branch into a new product or service, or hire new management), or by releasing value (encouraging management to buy back shares, or by asking for a better price as a shareholder of an acquiree in a merger or acquisition).

The incidence of hedge funds targeting European companies is increasing, and traditional shareholders are becoming more vociferous. But is this warranted? Are these strategies useful to investors in European stocks overall, do they unlock value? Or are they a distraction to management, leading to sub-optimal outcomes for shareholders?

In Europe, there has long been a culture of active engagement with company managements.

In Europe, there has long been a culture of active engagement with company managements by institutional investors. Aberdeen’s investment processes mean that we are in an ongoing dialogue with management of listed companies, either by active engagement, or by sitting on the limited partner advisory committee of a private equity firm where we have an investment.

Activism is not a new concept to us, or to Europe, but the approach is different. On this side of the Atlantic it tends to involve a continuous dialogue with management, as opposed to a one-off effort to inform strategy or unlock value, which can be the case with activist hedge fund investors.

Both approaches have their merits, although some activist investors are more focused on the internal rate of return of a particular trade than on long-term outcomes. As a long-only equity investor, we tend to prefer to work with activist investors who are aligned to our long-term approach, and who are focused on creating long-term value, rather than looking for a short-term reward, which may not be in all shareholders’ interest.

When we approach active investing, we take a long-term approach as responsible owners, on behalf of our clients, focusing on their long-term interests. We have been owners of companies targeted by activist hedge funds, and in some cases have supported them. One recent example is Rolls-Royce. Here, the US activist investor ValueAct has installed a board member with restructuring experience, and we agreed with management that this would be a good addition to the board and could help to drive shareholder value.

Activism is a strategy that we have pursued as a firm for decades on behalf of our alternatives strategies clients, as well as our equities and fixed income clients. At the same time, we consider ourselves stewards of investors’ capital, and seek to align our attitude to activism with our sense of stewardship, ensuring that actions we take are considered, and to the benefit of the client over the long term.

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