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1/20/2025

Fidelity Report Pulls Back Curtain on Minority Shareholder Participation in China

South China Morning Post (01/20/25) Ng, Eric

A new report from Fidelity International (FIL) showed that growth in attendance at the general meetings of mainland-listed companies has slowed, though minority investors have become more forceful in expressing their opinions on controversial proposals. A top-down regulatory push, including the implementation of a stewardship code, could improve the situation, according to the report, which was published last month with Beijing-based proxy advisory firm ZD Proxy Shareholders Services. “We may have hit a ceiling for the bottom-up, investor-driven improvements in stewardship practices, and the next phase of development may require clearer top-down direction from regulators,” said Tina Chang, an associate director for sustainable investing at FIL, in an interview. The firm said it had US$925.7 billion of assets under management at the end of September. According to the study, which covered around 46,000 resolutions at more than 5,000 shareholder meetings for more than 600 mainland-listed firms, the two-year average attendance among minority shareholders rose by 85 basis points between 2020 and 2021 and 2022 and 2023, about half of the 1.67 percentage-point gain from previous years. The trend could be attributed to reduced growth in minority influence through a decline in ownership concentration, as measured by the percentage of firms with a controlling shareholder owning 30% or more of the shares, the report said. The stagnating growth in the number of shareholders active in stewardship was cited in the report as another cause, due in part to lower foreign participation. Overseas investors held 8% of the freely floated shares listed on the mainland in 2023, down from 9.5% in 2021, according to data compiled by China International Capital Corp. A stewardship code could be one way improve the participation rate of minority shareholders in mainland-listed companies, Chang said, adding that the idea has been discussed by market participants. Regulators in China can refer to the prevailing practices in other countries when coming up with policies, she said. In the UK, companies adhering to a voluntary stewardship code, launched in 2010, are required to report on their shareholder governance practices and activities. Responsible regulators can vet their disclosures and approve them as compliant if they meet reporting expectations. In Taiwan, users of voluntary stewardship reports are scored and the top performers are publicly recognized. In Japan and Hong Kong, there is no regulatory vetting of the voluntary reports. In other areas of corporate governance, Chinese policies have borne fruit, Chang said. For example, regulatory requirements on independent directors of listed firms were tweaked in 2023. In the first half of 2024, independent directors sent 44 letters to the boards of listed firms demanding better protections for the interests of minority shareholders, she said. Such protections include timely disclosures, fairness of related-party transactions – for example, asset sales or transfers between a listed company and firms controlled by a parent – and greater oversight of executive compensation. Chang said, however, that minority shareholders in China remained reluctant to put forward resolutions requiring shareholder votes, preferring to express dissent in private. Among the listed firms studied, only 14 proposals were submitted by minority shareholders between 2022 and the first half of last year, which was double the tally recorded between 2020 and the first half of 2022. The vast majority were related to the nomination of candidates to corporate boards. There were not any related to climate-related risk management. Chang said these kinds of proposals are expected to rise this year, after a legal change became effective. It lowered the minimum ownership threshold for submitting shareholder resolutions to 1% from 3%. “What we found more effective at the moment on climate and [environment, social and governance] issues is engagement and building trust with companies,” she said. “Escalation by filing shareholder proposals is a tool that is usually used further down the line.”

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1/17/2025

What Next for Glencore After Failed Rio Tinto Merger Talks?

Financial Times (01/17/25) Hook, Leslie; Hodgson, Camilla; Fildes, Nic

Glencore (GLNCY) chief executive Gary Nagle had a clear message at an industry event last October: the mining sector needs fewer, bigger companies in order to stay relevant. More consolidation is needed, he told a private conference hosted by Goldman Sachs at LME Week. As it happened, Jakob Stausholm, the boss of rival mining company Rio Tinto (RTNTF), was also speaking at the event. Around the same time, Glencore and Rio held tentative talks about combining part or all of their business to create a $160 billion mining behemoth. Glencore’s “bigger is better” mantra has made it one of the most aggressive and ambitious dealmakers in the sector, even if those deal discussions do not always work out. While discussions with Rio did not progress beyond early stages, megadeals are back in vogue for the mining sector. The question ripping through the industry now is: what will Glencore do next? The return of big mining M&A was supercharged by BHP Group’s (BHP) failed £39 billion bid for Anglo American (NGLOY) last year, which spurred companies to review their strategic options. But it is also due to structural factors: the 20-year commodity supercycle driven by China has ended, and miners are repositioning themselves for the next phase of growth, in which the energy transition is expected to boost demand for copper and battery metals. Glencore has dealmaking in its DNA. Founded as a commodity trader in 1974, it built up its mining business almost entirely through acquisitions. Under former chief executive Ivan Glasenberg, a pugnacious South African who ran the company from 2002 to 2021, Glencore went public in 2011, and announced it was merging with Xstrata the following year. “They are always trying to do deals, more so than the big mining companies,” said Barry Jackson, chief executive of mining consultancy Ascentia Resources. “You hear about Glencore talking with every mining company in the world.” One of the biggest barriers for Glencore is that other miners are generally more conservative when it comes to mergers and acquisitions. Compared with bigger rivals where the M&A process is very tightly controlled, at Glencore “the freedom to do those kind of initiatives is higher,” Jackson said. Glasenberg — who still owns 10% of Glencore’s shares — earned a reputation as an enthusiastic dealmaker and his successor Nagle has continued that tradition, holding talks on potential megadeals every year since he became chief executive. In early 2022, Glencore held preliminary talks with BHP about a deal that would have brought the two companies together and spun out their combined coal businesses, according to four people familiar with the discussions. The next year, Glencore launched a hostile $23 billion bid for Canada’s Teck Resources (TECK), proposing a similar structure: merge, then demerge into a metals group and a coal group. That bid failed due to opposition from Teck’s management and controlling shareholders; instead a Glencore-led consortium bought Teck’s steelmaking coal business in a $9 billion deal later that year. Last year, after BHP’s bid for Anglo became public, Glencore examined making a rival bid for Anglo, but did not make an offer. The talks with Rio took place in September and October, but did not progress. Rio previously spurned an approach from Glencore in 2014. Rio CEO Stausholm has said Rio is interested in deals that boost its growth profile, but stressed that there is no “fear of missing out” at the company, which is guarding against a move that could “derail” the business. Rio is under pressure from an activist shareholder campaign to activist move its primary listing from London to Sydney — as BHP did — which the activists argue will give the miner greater power for share-based deals. Rio, which is listed in both London and Sydney, has not done a share-based transaction since its dual-listing structure was established. One handicap for Glencore is that its share price has fallen 17% in the past six months, giving it less financial firepower for any next potential deal. Earnings have normalized after the bonanza couple of years that followed Russia’s invasion of Ukraine, and lower volatility in commodity prices has reduced trading profits. During the first half of 2024, Glencore reported a loss of $233 million, partly due to a $1 billion impairment charge related to its South African coal operations. With the Rio talks now on ice, analysts believe a Glencore-Anglo combination could make sense. In the wake of BHP’s failed bid, Anglo launched a radical restructuring, which will split off four of its businesses, and leave behind a company focused on coal and copper.

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1/16/2025

Honeywell Breakup Would Set the Stage for a Tidy 25% Gain

Bloomberg (01/16/25) Shen, Yiqin; Dey, Esha

Honeywell International Inc. (HON) executives may have needed nearly eight years and two activists to decide on a breakup, but the wait may be worth it for shareholders, who stand to reap a return of as much as 25% from the move. The roughly $145 billion industrial conglomerate is poised to split into two businesses focused on aerospace and automation, Bloomberg reported this week. The breakup would follow a pressure push from Elliott Investment Management that echoes a similar campaign in 2017 by Dan Loeb’s Third Point LLC. Analysts from Bloomberg Intelligence to Barclays Plc put the value of Honeywell’s various assets at between $260 to $280 a share, based on so-called sum-of-the parts calculations. This implies a potential upside of roughly 20% to 25% compared to the stock’s closing price Wednesday, with room for even more gains over time. Honeywell is the latest industrial company to consider unwinding its conglomerate structure, a strategy that has proved profitable for rivals including General Electric Co. and RTX Corp., formerly United Technologies Corp. The idea is that separate, more focused businesses will have a better opportunity to improve their performance over time — and attract investors — than they would under one large umbrella. “We have the templates of other conglomerates breaking up, GE one year ago and UTX five years ago, and on the whole very successful,” Barclays analyst Julian Mitchell said in an interview. “There is nothing about Honeywell’s business that suggests it should be less successful than those.” Take GE, which now operates as GE Aerospace after separating its power and health-care divisions. The company’s shares have risen more than 150% since late 2021, when the company announced the split, and the two spinoffs have also gained. The S&P 500 Index has climbed 27% over the same period, while Honeywell’s stock is down slightly. For Honeywell, like GE, it’s the aerospace division that carries the most value and will likely be worth more as a pure play, according to Bloomberg Intelligence’s Karen Ubelhart and Christina Feehery. In their analysis, the “crown jewel” unit deserves a premium valuation because its profit margin is ahead of peers including GE, while the aerospace market is benefiting from secular growth. On a standalone basis, the other parts also have higher-than-peer margins. The bull-case thesis is echoed in the buyside community. “If you believe in shareholder value creation, this is how Honeywell can do it,” said Jeff Cianci, director of investment strategy and research at Catherine Avery Investment Management. To be sure, while many agree that a Honeywell breakup would add value, the process may take a long time to develop — roughly 18 months to two years, if recent transactions in the industrial space are any measure. “The market does not really have a lot of patience and investors might only revisit when the process gets closer,” said Citigroup Inc. analyst Andrew Kaplowitz. Once the process does get going, though, it may just be the start. For example, a potential automation spinoff would contain a mix of businesses that don’t necessarily belong together, according to Bloomberg Intelligence’s Ubelhart. “The rationale for them staying together is not clear to me, and there could be further splits later,” she said. “They are going to have to do more.”

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1/14/2025

Heard on the Street: Macy’s Kicks Off a Crucial 'Harvest' Year

Wall Street Journal (01/14/25) Lee, Jinjoo

Macy’s (M) Chief Executive Tony Spring knows people think department stores are irrelevant. He’s going to keep trying anyway, albeit on a tight budget. “I challenge myself and I challenge our team: Forget the nomenclature or moniker that we’re given. Imagine we’re simply in a business where we can sell any category we want,” Spring said at the retail industry's ICR Conference Tuesday. Shares in the department-store operator, which also owns the upscale Bloomingdale’s and cosmetics-focused Bluemercury, fell more than 8% Monday after it gave a worse-than-expected picture of the holiday selling season. At best, the company expects net sales to drop 3.7% in the three months ending late January from a year earlier. A warm start to the quarter, plus uncertainty before the presidential election, both hindered sales, according to Spring. Macy’s shares slipped further on Tuesday morning, after the conference presentation. Spring is sticking to his playbook laid out about a year ago. He is closing about 150 underperforming Macy’s stores. Others are being spruced up with better presentation and more staffing in key areas, like the shoe department and fitting rooms. The company picked 50 stores to improve last year, and will overhaul 75 more this year. The revamps seems to be working: Improved stores have now logged three consecutive quarters of year-on-year growth in comparable sales. So far this quarter, comparable sales have kept growing for those stores, while they have declined in other Macy’s stores. However, while investing in store improvements is core to Spring's strategy, Macy’s won't step up overall spending anytime soon. Adrian Mitchell, chief operating officer and chief financial officer, said on Tuesday that the company is in “harvest mode” after investing more heavily in the last few years in areas like technology, online businesses and its third-party marketplace. Capital spending totaled about $1.3 billion in 2022, but Macy's pared that back to under $1 billion in 2023 and expects to spend $895 million in the financial year ending later this month. So far, returns on that outlay haven’t been very visible. Over the last five years, Macy’s return on invested capital has lagged peers — even struggling Kohl’s (KSS). Activist investor Barington Capital, which revealed a stake in Macy's in December, thinks it should cut capital expenditures to 1.5% to 2% of sales, from about 4% now, in favor of share buybacks. If Macy’s doesn’t deliver a decent harvest this year, investors could start to run out of patience and join Barington in asking for cold hard cash.

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1/14/2025

Can the Pfizer Machine Fight Back Against Starboard Value?

Endpoints News (01/14/25) Lee, Jaimy

Pfizer (PFE) says it’s back on track. After a tumultuous 2024 filled with more cost cuts, an activist investor, a pulled drug and executive changes, CEO Albert Bourla said Monday that he’s ready to take on whatever comes next. That includes a second Trump administration, navigating a complex relationship with China, and the increasingly crowded obesity market. “There is no one like the Pfizer machine in getting things done,” Bourla told a small group of journalists. Bourla has brought on two new board members to seemingly address the concerns of institutional investors, and he also promoted Chris Boshoff, a strategy-minded cancer scientist wearing sneakers to the JP Morgan Healthcare Conference, to replace Mikael Dolsten and run R&D. Fourteen days into the job, Boshoff’s already made his mark. Pfizer now focuses on four therapeutic categories for R&D. To no surprise, the first is oncology, given the company just spent $43 billion to buy ADC maker Seagen. Its other hubs are vaccines, internal medicine, and inflammation and immunology. Each has the ability to work on discovery, early- and late-stage development, and business development, among other divisions. “They actually function as small biotechs,” Boshoff said. “We’re investing significantly in R&D internally,” CFO Dave Denton said. “We also need to think about acquiring science externally and bringing it into Pfizer, to maybe not directly focus on the patent cliff of ’29 and ’30, but actually just continue to grow our business.” Is all of this enough to ward off Starboard Value, the activist investor that took a stake in the company last year? After a seemingly hostile start to the relationship, Bourla suggested he wants to work with Starboard, not against them. “I’m in constant contact with them,” Bourla said. Bourla also wants it to be known that he doesn’t melt under the pressure, in part driven by his own knowledge of what the company accomplished under real pressure during the pandemic. “Pfizer is the same company that saved the world two years ago,” he said.

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1/13/2025

Southwest is the Latest Big Firm to Choose a CFO Search over Succession Planning

Fortune (01/13/25) Estrada, Sheryl

CFO turnover at major companies continues this year, with Tammy Romo, Southwest Airlines’ (LUV) EVP and chief financial officer since 2012, planning to retire. However, Southwest didn’t announce a successor for the longtime CFO. Rather, it will begin a search for her replacement. Romo, who joined Southwest in 1991, will retire on April 1, the company announced on Jan. 9. Over the past 33 years, she has held many leadership roles, such as head of investor relations, controller, treasurer, and SVP of planning. Romo has worked at Southwest, considered a pioneer of the low-cost airline model, long enough to have been part of the company’s remarkable growth story. Southwest made its debut on the Fortune 500 list in 1995 at No. 434. It has earned a spot on the list every year since, landing at No. 159 in 2024. Southwest opting to conduct a search for Romo's replacement is indicative of what seems like a larger trend. About 1 in 4 of 200 CFOs surveyed indicated that their organizations do not have a formal CFO succession plan to identify and develop internal talent for the role, according to Deloitte's Q2 2024 CFO Signals survey. And among those that said there isn't a plan, 28% were from enterprises earning at least $10 billion in revenue. In general, an aspect that can make CFO succession planning challenging is the evolving role of finance chiefs. Nicolas Owens, industrials equity analyst at Morningstar Research Services, thinks Romo's retirement is “a routine type of matter,” and she's giving someone else a shot at the role. What type of CFO will Southwest need? “I think the person they hire would certainly benefit from having airline experience, just because of some of the quirks of running the airline business,” Owens stated. That includes accounting for mileage programs and handling the balance sheet, for example, he said. Last September, the company announced a three-year transformation plan. For example, Southwest, known for its open seating, will begin selling assigned seats in the second half of the year. In December 2022, Southwest's outdated scheduling software couldn't handle the effects of severe winter weather, leaving crews and planes out of position, which caused massive delays. The company's plan also includes implementing technology for revenue management, reservations, inventory management, and departure control, in which the CFO would have involvement, Owens said. The C-suite changes at Southwest, including Romo, and Chief Administration Officer Linda Rutherford, who is also set to retire, follow engagement from Elliott Investment Management. The hedge fund essentially agreed to a compromise with Southwest, including six new board directors and an earlier retirement for Executive Chairman Gary Kelly, Owens said. “The transformation is a reasonable approach to address what I think is a competitive problem,” Owens said. “The CFO or even the CEO, can't change the competitive landscape, but they can change how they respond,” Owens added.

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1/13/2025

Goodbye ‘Accountant Archetype.’ Former CFOs are Dominating the C-suite

Fast Company (01/13/25) Mehta, Stephanie

The CFO-to-CEO transition is becoming increasingly common across corporate America. To be sure, most of those executives expanded their portfolios beyond finance. “As more and more CFOs are indexing around operational excellence — not the accountant archetype any longer — they are increasingly interested in becoming CEOs at some point,” says Jenna Fisher, co-head of leadership advisory firm Russell Reynolds Associates’s global financial officers practice.? “I would say about 50% of CFOs that we talk to express some interest in potentially becoming a CEO at some point in their career.” The rise of CEOs with financial expertise also coincides with a growing number of activist shareholder campaigns. Last year, investors launched 243 campaigns, up from 229 in 2003 and just below a peak of 249 initiatives in 2018, according to Barclay’s research. Twilio CEO Khozema Shipchandler — a former CFO at General Electric Co. (GE) — says former CFOs certainly are accustomed to listening to investors and proactively seeking out their feedback. And he says ex-finance executives can be seen by investors as a steady hand. “Founders and technologists anchor more towards growth and risk,” he says. “CFOs naturally ground or anchor themselves more towards risk management and cost controls. They know that you’re not going to let the place get away from itself from a cost perspective or that the company is not going to take outsized risks.” Indeed, former CFOs may have to work to shed their conservative instincts as they move into operational and chief executive roles. “A CFO aspiring to be an effective CEO needs to do a mindset shift,” says Janice Ellig, CEO of executive search firm Ellig Group. “They need to let go of what they did so well, entrusting their successors to run the finance function while they— as CEOs — demonstrate to the company their bolder competencies and attributes to take the company to new heights.” And while Shipchandler recognizes the importance of soliciting the feedback of investors, he cautions that the perspectives of shareholders shouldn’t dominate. “If we were just doing things for activists, I think we’d be running a really short-sighted and perhaps even misguided play,” he says. “I think what investors — all investors, including activists — ultimately want is an innovative, well-run company.”

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1/10/2025

Analysis: The New Era of Institutionalized Shareholder Activism

IR Magazine (01/10/25) Goldfarb, Bruce

The trends in activism are shifting in form and focus, heralding the start of a new, more institutionalized era, according to Bruce Goldfarb, President and CEO of Okapi Partners. A host of factors, including leadership transitions at high-profile activist firms, a lack of ‘low-hanging fruit’ and the tendency of company boards and their adversaries to settle rather than fight, have many in the activist world wondering if the days of the old-fashioned, two-fisted activist campaigns are numbered. As activist giants like Carl Icahn step away from the fray, so goes the era of the ‘corporate raider’. To be sure, there will still be high-profile corporate battles waged by the likes of top-notch activists including Elliott Management and Starboard Value. But even the titans have developed new targets and tactics that signal a new era of activism. "In 2025 and beyond, I predict that we’ll experience more campaigns launched against smaller corporate targets and more foreign targets, an increase in contested M&A deals and perhaps additional efforts aimed (pro and con) at companies’ ESG and DE&I policies," writes Goldfarb. "Moreover, large-cap companies that underperform their peers will remain on the radar screen, as always, and the well-capitalized activist firms will continue to scrutinize these targets." Companies and boards will need to adapt to this new era by understanding their shareholder base better. It’s especially important to assess each shareholder’s need and desire for regular engagement – not just when a proxy vote is on the line – and to calibrate the company’s engagement practices accordingly to ensure they continue to be effective. "Today, we are seeing the emergence of newer, smaller (but in some cases, growing) activist firms, many of which were launched by former employees of other successful activist investors," Goldfarb suggests. "The newer entrants sprout from a different generation and take advantage of rapidly evolving technology, make use of social media and media attention to activism, and play by increased disclosure rules. These players look very sharply into smaller companies where they can invest a meaningful ownership position relative to their firms' AUM in the hope of impacting change and unlocking value." Goldfarb believes the resurgence of the M&A market is another factor that will spur activist campaigns in the year ahead. According to some estimates, M&A activity is expected to grow by another 10% overall in 2025 (including a 16% rise in private equity buyouts), as the fiscal and regulatory policies of the new administration in Washington take shape, economic activity remains robust and interest rates remain more subdued. A robust M&A market will likely lead to more contested transactions. Activist investors launch M&A opposition campaigns to recalibrate offer prices, or in certain cases to scuttle deals because they believe there may be better alternatives. "Regardless of the types of activist campaigns that launch in the coming year, one thing is certain," says Goldfarb. "Campaigns will be starting earlier. With the rules of the road set by advance notice bylaws provisions, countless successful activists must begin working on campaigns many months before the actual launch. And, by the same token, many companies are mounting year-round efforts to head off a proxy fight by engaging more actively and often with their shareholders."

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1/8/2025

As Standards Rise, Tokyo Stock Exchange Delistings Hit Decade High

Japan Times (01/08/25) Nagata, Kazuaki

Almost 100 companies were delisted from the Tokyo Stock Exchange (TSE) in 2024, the most in a decade, as standards were tightened and investors became more demanding. The high number of delistings was also related to the desire to avoid activist investors. According to TSE data, 94 companies were delisted from the Tokyo exchange last year, the highest number since it merged with the Osaka Securities Exchange in 2013. A total of 61 companies were delisted in 2023, and 77 in 2022. Analysts say that the latest figure reflects recent trends in the market. Listed companies have been under pressure to improve governance and capital efficiency, while some have chosen to go private to seek more flexibility in their business strategies. “The bar has been continuously raised for companies seeking or maintaining a listing,” said Chisa Kobayashi, UBS SuMi Trust Wealth Management's Japan equities strategist in Tokyo. Some companies may have chosen to go private to evade activist investors, which have been more active in Japan in recent years, analysts say. Others have delisted after ownership changes. Lawson went private in July after KDDI raised its stake to 50% through a tender offer. Along with demands to strengthen corporate governance, the TSE has rolled out some reforms to put more pressure on underperforming companies to improve their value to attract more investors. In 2022, the exchange restructured into three market levels — Prime, Standard and Growth — as too many companies, including some with weak capitalization and anemic earnings, were concentrated in its First Section, its top tier before the restructure. The TSE made the criteria to remain in the top section stricter and offered a grace period to companies that did not meet the new standards, with March 2026 as the deadline. Last March, the TSE told all companies listed on the Prime and Standard sections to increase corporate value in the medium-to-long term and draft specific plans to do so. In particular, the TSE pushed companies with price-to-book ratios of under 1.0 to show improvement. The price-to-book ratio is an indicator that compares a company's market value to its book value. Starting in April, all Prime market-listed companies are also required to release quarterly financial statements and other key information in both English and Japanese simultaneously. Given that the standards are getting higher, “the number of delisted companies or those going private will likely continue to increase,” Kobayashi said. “The situation may seem harsh for some companies, but I believe that looking at this from an index-level perspective, it will lead to greater market efficiency, which in turn will contribute to an overall increase in corporate value in the medium term.” Others may also withdraw from the market to defend themselves from unexpected buyouts following Alimentation Couche-Tard’s (ATD) attempt to acquire Seven & I Holdings (3382), the parent company of the 7-Eleven chain of convenience stores. Seven & I is considering a massive management buyout that would take it private to fend off the takeover.

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