It first appeared in the Australian Financial Review, 20 April 2016.
For some time now we have been focused on defending boards against economic shareholder activism.
While we see the importance of governance checks and balances imposed by shareholder rights, we have had a major problem with hedge funds who make trouble for a living.
Earlier this month, two of our colleagues released a corporate governance report, reflecting the results of a director survey that illustrated the problem in several ways. The report, titled “Directions 2016 – Current issues and challenges facing Australian directors and boards”, is an annual temperature check on current issues that is now in its sixth year. As a result, our firm has a comparative body of survey results second only to being inside the boardroom. For the last two years, it has been launched with the support of the Australian Institute of Company Directors.
One of the most interesting results from this year’s survey is the concern that boards are demonstrating about short-termism.
The report approaches this in two ways. First, Australia has one of the highest levels of CEO turnover in the world. Survey respondents commented on the high cost this has imposed on Australian business and, in particular, the adverse impact on long-term strategy and planning. Australia's high C-suite churn environment lends itself to insecurity regarding short-term results. This inhibits investment, risk-taking and strategic initiatives.
Secondly, the survey asked respondents to consider the greatest inhibitors to achieving growth in their organisations. The top responses were all linked to short-termism.
The top response (at 39.6 per cent of respondents) listed lack of capital/funding to invest. This did not come from lack of available capital. Low interest rates, record high levels of corporate cash and investment funds awash with dry powder make that clear. It is purely attitudinal. Corporates are being pushed to pay out their cash and reduce capex.
The second top response (36.1 per cent) was aversion to risk-taking, with the third being a short-term focus by management (28.8 per cent). Rising stakeholder influence is cited as one of the causes of all these concerns, however, the report sees both the challenge and the opportunity in this dynamic. The results had 53.7 per cent of respondents saying their organisations had changed/improved their strategies or policies as a direct result of stakeholder pressure.
The fourth factor reported as inhibiting growth was lack of incentives to promote innovation. Clearly boards can look to do more here to reset time horizons against which performance is measured (admittedly they need the support of enough patient shareholders).
When you plot the decline in capex spending against the rise in dividend payout ratios of recent years, it is clear the long-term must suffer. Boards have recently seized the opportunity to cut back the level of those payouts. However, economic headwinds will only enable that for so long. Shareholder activism in its many forms is a direct cause of this phenomenon.
What do we make of all this? We think boards are powerless to arrest these trends. Long-only institutions are the only ones who can rally to turn it around. They need to form a vocal counter-weight to short-termism, hold stock through periods of activist hedge fund activity and pare down securities lending in vulnerable stocks that enable short selling.
In the end, they will suffer most if they don't.