Does shareholder activism add value?
While shareholder activism has been on the rise in the US, in South Africa the bar has been set very low. Most shareholder activism has targeted directors’ remuneration, has been directed at larger companies, and has tended to take place behind closed doors. The question is: does shareholder activism add value? Denker Capital frequently engages with boards of listed companies and in this article, we explain our latest engagement with the board of Grand Parade Investments. In our experience, when guided by integrity, the right motives, hard work and grit, shareholder activism can add significant value to all shareholders.
Shareholder activism comes in many different shapes and sizes.
The answer to the question posed in the title of this article depends on the motives and modus operandi of the activist shareholder or group of shareholders. Shareholder activism is generally about being a catalyst for change, whether this is by simply asking for further disclosure (mostly relating to directors’ remuneration) or by a full-blown proxy contest (as we will discuss later).
Denker Capital has frequently engaged with the boards of listed companies about corporate governance.
In some instances, we have been more active by facilitating and supporting constructive changes involving the introduction of new management. In most cases, the changes have unlocked value for our clients. Recent examples include Altron and Adcorp, which have appreciated by 200% and 100% respectively since management changes were implemented.
While individual shareholder activism achieves publicity and awareness, more active participation is required.
The ‘corporate watchdog’ approach creates more awareness about environmental, social and governance (ESG) issues; it is less effective where more active participation is required to unlock inherent value. The collapse of Steinhoff has also highlighted the importance of shareholders taking a more active role as custodians of their clients’ savings.
Denker Capital’s active engagement with the Grand Parade Investments board since 2017 has created positive change.
The process began in mid-2017 when we asked to meet with the non-executive chairman, Hassen Adams, about several concerns. These concerns included:
- The departure of the CEO at the time (Alan Keet) and the lack of experience of the remaining team
- The poor site selection of several Burger King stores
- High central costs
- Questionable acquisitions (including the acquisition of Mac Brothers catering equipment from Adams as well as the failed attempt to increase the investment in Spur at inflated prices)
- The loss-making ventures into Baskin Robbins and Dunkin Donuts
At the time, our concerns fell on deaf ears, but we continued to vote against poor governance.
Over the following months, there were further executive management departures (to date three CEOs and two CFOs). For the second year in a row we voted against the company’s remuneration policy that supported directors receiving bonuses while the company continued to report losses. The response we received from the lead independent director, Dr Norman Maharaj, was dismissive, but also revealed the non-disclosure of a contract with the Executive Chairman (Adams) that entitled him to receive deal fees on asset transactions within the business. This perverse incentive encouraged the wrong behaviour with little or no alignment with shareholder interests.
Poor governance included a lack of experience, inadequate independence, and long terms on the board.
It is our view that many of the issues at Grand Parade Investments arose because of a culture of poor governance enhanced by a lack of independence and indeed ineptitude of several of the non-executive board members. Two of the five non-executive members of the board have served for 21 years and another for over 10 years. This is in direct contravention of the King Report and King Code on Corporate Governance.
Our preference is to first engage with the board to achieve a better outcome.
In the instance of Grand Parade Investments, however, having already attempted to engage with the board without success, the only remaining solution was to seek the removal of the entire non-executive board by exercising our rights to call an Extraordinary General Meeting (EGM). This recourse is made available to minority shareholders (who individually or collectively own more than 10% of the shares in a business) by the Companies Act. Following this, there were several failed attempts by the company to delay the EGM process while at the same time falsely depicting a picture that the minority shareholders were attempting to take over the company.
The JSE must be commended for their role in the process by ensuring that all shareholders were treated fairly.
In an unprecedented move, the JSE published the reasons for the proposed replacement of all non-executive directors of Grand Parade Investments on behalf of dissenting shareholders. The outcome was that two non-executive directors were replaced by independent, highly experienced individuals (Mark Bowman and Ronelle van Dijk). They will bring much needed operational experience, independence and business acumen to the company.
Shareholders have already benefited from a rising share price, and we look forward to further beneficial outcomes.
Since the SENS announcement calling for the EGM was published on 23 August 2018, Grand Parade Investments’ share price is up in excess of 80%. At R3.20, we still believe there is substantial upside and we look forward to the impact that improved corporate governance and capital allocation will have on the business.
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