High-profile shareholder activism used to be a rare beast, writes Deirdre Hipwell. An unusual event, much remarked upon, but which was typically not investors’ preferred method of engaging with companies, particularly in the UK.
Now, however, it is hard to miss a listed company facing some form of public, and sometimes hostile, shareholder activism.
Premier Foods, the maker of Oxo cubes and Ambrosia custard, has an activist in Oasis Management and recently granted the investor a non-executive board seat. Akzo Nobel, the owner of Dulux paints, is locked in a vicious and increasingly acrimonious wrangle with Elliott Advisors, which is trying to remove the chairman of the Dutch coatings and paints group. Elliott wages war on a number of fronts – it recently turned its guns on BHP Billiton, the world’s largest mining group, and last year won a high-profile campaign against Alliance Trust.
The property industry has not emerged unscathed from this upswell of activism. Grainger, the listed residential group, was criticised for its “unexciting” business plan by Crystal Amber last year and most recently JLL has come under fire from Al Gore. Well, not quite Al Gore himself – the former US vice-president’s investment fund, Generation Investment Management, has taken issue with the $11m (£8.5m) pay granted to chief executive Colin Dyer last year.
Quite a big issue, as it turns out.
GIM sent a letter earlier this month to Institutional Shareholder Services, a proxy advisory and corporate governance group that issues guidance to shareholders, such as hedge funds and institutional investors that hold shares in multiple companies, on how they should vote on key issues, such as pay, at annual meetings. Its research into companies and guidance is highly respected.
In the letter the fund criticised the outgoing Dyer’s pay package as “a clear example of pay for failure”. It claimed his remuneration was unjustified given JLL’s “poor execution” and “disappointing total shareholder returns over the past three years”. Generation even questioned whether “the retirement agreement was written by Dyer himself, rather than independent board members supposedly acting in the interest of shareholders”. The excoriating letter claimed that in general it believed JLL’s compensation policies were too heavily weighted towards short-term performance and “easily fudged” factors, such as adjusted EBITDA.
Generation Investment Management’s action is notable for a host of reasons. This is the first time since Generation was founded in 2004 that it has ever gone public in this manner. In the UK wrangles over executive pay are commonplace but there often tends to be less shareholder outrage in the US about uber-sized pay packages. So the fact that Generation has felt the need to go public is newsworthy in itself.
Generation is also the third-largest investor in JLL, with a 7.5% stake, so this is heavyweight criticism that cannot be ignored. It is worth noting too that some of Generation’s 7.5% stake will include proxy voting rights it holds on behalf of some of its investors. Generation also took a further step last week by writing a letter to all its clients, some of whom may hold JLL shares in their own right or though other funds, to ask them to support its action against JLL. Generation has indicated that at JLL’s annual meeting next week it will vote against both the re-election of the chairwoman Sheila Penrose and JLL’s “say on pay” resolution.
Who knows if Generation will rustle up enough support for a shareholder revolt on pay but it will certainly ratchet up the pressure on JLL. The ethically-minded fund manager’s intervention appears to have already had some influence on ISS, which earlier this week advised JLL shareholders to vote against the three-year “say on pay” vote.
On the face of it Generation seems to have some legitimate complaints. In the three years to 31 December, total shareholder returns at JLL were 0.02%. This compares very poorly to the 29% rise for Standard & Poor’s 500 Index during the same period. Dyer’s pay is also twice as much as CBRE’s Bob Sulentic received and in Generation’s opinion CBRE is “better run”.
However, criticising JLL for “short-termism” may be a bit unfair though as that is an accusation that can be levelled at many listed companies facing the rigour of quarterly reporting and targets. And although Generation may have an issue with JLL linking its executive compensation to its adjusted EBITDA, which stripped out the cash expenses related to one abandoned acquisition, under Dyer the consultancy has grown its revenue by almost six times and its annual net income by five times.
Despite the paltry 0.02% return over the past three years, JLL says its shareholder return in the year-to-date in 2017 is 12.5% compared with the S&P at 7%. JLL has also told me that it’s “never possible to know what of the many complex factors, including the political or economic environment, actually influences our stock price in any time period.”
That is true, but we do know that shareholder activism can be surprisingly effective. JLL is going to have to face this criticism headfirst and prepare for a potentially feisty annual meeting next week.
Deirdre Hipwell is retail and M&A editor at The Times
