Hudson Sandler was a calm attendee at ‘High Anxiety’, the Reuters Breakingviews Predictions 2019 event. This year’s title was from Mel Brooks’ 1977 film satire, which is centred on the ‘Psycho-Neurotic Institute for the Very, Very Nervous’. As the ReutersBV team suggested, with tremendous uncertainty ahead for global markets, investors have much to be wary about this year.
While the team at ReutersBV is confident in some of its own predictions for 2019 - a drop in private equity returns; a continued rise in corporate investment in environmental, social and governance (ESG) issues; and the worsening of tensions between the United States and China - the audience was asked for its opinion on other critical questions we face this year. When asked which investment would perform best in 2019, more than 50% of the audience voted for Canadian cannabis stocks as opposed to US equities, crude oil, sterling, or Chinese bank shares. In the political sphere, voters predicted a 30% chance of President Trump being impeached by the US Congress, while more than half the audience picked Sajid Javid as the person most likely to be Prime Minister this time next year. With a turbulent 12 months ahead of us, a lot can change.
The event’s panel discussion, including guest speakers from Lazard and Gatemore Capital Management, focused on European shareholder activism and its impact on corporate behaviour. The group discussed the challenges faced by business to meet the increasingly high expectations of corporate governance while also delivering the value that shareholders demand.To avoid entering difficult dialogues or potentially public disputes with shareholders seeking change, it was suggested that companies should stress-test their businesses on ‘sunny days’ and behave like their own activists to seek out areas where improvements could be made, or value created.
Rich Thomas, Managing Director at Lazard, suggested that communication is a company’s ‘strongest weapon’ when dealing with activists. Being open and transparent is key, although it’s just as important for a company to be clear about what it’s not doing, as what it is doing to deliver growth and value. For example, if a board decides that separating or demerging businesses is not the best option to deliver value, then this should be clearly explained, anticipating any questions on the subject.
While activism shouldn’t necessarily be viewed as negative (as ultimately, both company and activists should share the same goal of delivering shareholder value), it is clear public spats can result in reputation-damaging headlines. Although the media isn’t necessarily biased towards activist shareholders, a public war of words will always make for a good story. And with workers now being more vocal around the way businesses are run, and with the UK government recommending corporates include employee representation on boards, companies need to pay even closer attention to the way in which they communicate with all their shareholder groups.
Those which do are likely to benefit, companies that don’t should heed the words of Nurse Diesel in High Anxiety: ‘Those who are tardy do not get fruit cup.’