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BlackRock endorses practice of directly managed activism to oppose portfolio company's management

 

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Source: Activist Insight, March 4, 2016 newsletter

Activism this week

Over in Hong Kong, a shareholder in a listed mining company has just written to its fellow shareholders accusing the issuer of multiple governance failings, including spending money from a rights issue on car parking spaces and investments in real estate funds, demanding the return of excess capital and soliciting votes against a deal that has the board’s approval. The obligatory campaign website, Protect Value for G-Resources Shareholders, has just been made live.

If you clicked the link above, you’ll have noticed that this shareholder is not your typical activist. Instead, it’s BlackRock, the world’s largest money manager and a vocal critic (through CEO Larry Fink) of activists that push companies to follow short-term agendas. What BlackRock is doing at G-Resources certainly feels like an activist campaign, and it may be the first time it has ever publicly lambasted a portfolio company this way, but onlookers should think twice before accusing the firm of hypocrisy and instead cheer that it has acknowledged activism’s potential for good.

Like many other investors, BlackRock bought into G-Resources to gain exposure to its gold mine on behalf of clients who wanted to invest in the precious metal after the financial crisis. More recently, G-Resources decided to sell the mine—which the company itself describes as its “core asset”—because of volatility in commodities markets (if the deal goes through it will instead grow its investing and lending businesses).

BlackRock complains that this abrupt change of direction is contrary to its own investment objectives and expresses concern that G-Resources has not brought expertise on its new businesses into its boardroom. That the roughly $775 million deal, struck with a company in which G-Resources’ Vice-Chairman, Owen Hegarty, is ultimately a major shareholder, is not considered a related party transaction under Hong Kong law must have added to BlackRock’s urgency, even though Hegarty himself will abstain. CST Ming Group, G-Resources’ largest shareholder with just under 17%, has committed to vote for the transaction.

Proxy voting advisers Institutional Shareholder Services and Glass Lewis have both recommended against the deal and also taken the unusual step of allowing BlackRock to make their reports public—one proxy solicitor Activist Insight spoke to could only recall one other instance. Each highlighted the issue of whether a board should be entitled to handle corporate assets as it chose, with Glass Lewis writing "In short, the board is proposing to completely eliminate exposure to the asset solely responsible for the entirety of [the company’s] revenue for its most recently reported fiscal year in order to pursue lines of business to which the company obtained the bulk of its current exposure no earlier than mid-2015.” ISS took a slightly more nuanced view, saying “While ISS views that boards should be granted enough flexibility to pursue strategic opportunities, the board, in this case, has not made a compelling case to justify the disposal of the company's core asset.”

Two points are worth making. The first is that management of company assets have become subjected to increasingly intense shareholder interest in recent years (recall shareholders’ fury at Darden Restaurants’ sale of Red Lobster), and those situations requiring a ballot can be a lightening rod for broader discontent.

The second, which is at least as interesting, is the fact that BlackRock felt it had no choice but to intervene. As Pru Bennett, Head of BlackRock’s Asia Pacific Investment Stewardship team said in a statement, “We are disappointed that G-Resources’ disclosure and governance has fallen well below the standards we expect from a Hong Kong listed company… As the world’s largest asset manager and a leading investor in Asian equities, we believe companies in Asia must increase their efforts in reaching the highest levels of corporate governance, and see this as fundamental to creating long-term sustainable business value.”

Thus shareholder activism continues its ascendancy, even as the precise form remains subject to challenge. I would be surprised if no other asset managers picked up the baton in 2016.

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