Tuesday, April 09, 2013

Shareholder is king!

The recent Agrium- Jana spat seems like a story straight out of a Jeffery Archer book. Except that in an Archer book, activist shareholder coups are the result of ulterior motives of business rivals. In case of Jana Partners though, which in the past has managed to ‘de-conglomerate’ (for want of a better word), the likes of McGraw Hill, the motive is to unlock value in Agrium. A value that they believe has been lost in translation.

The case Agrium makes is that their presence across the whole value chain gives them better bargaining power.  They apparently got access to the Viterra acquisition with those terms because they were all across the value chain. Jana on the other hand believes that such omnipresence actually prevents Agrium from generating a value it could potentially have. So they would like to have the retail arm and the potash business hived off. Jana also claims that they would like to see better corporate control and better cost control in the company.

A rather nasty war of words has since ensued. As the largest shareholder of Agrium, with over 7.5%, Jana definitely has a strong say in the company’s decisions. And they are certainly taking the corporate governance duties of a shareholder very seriously, by sinking in a lot of money, time, effort and might into this proxy battle. They have apparently spent over $1 billion towards acquiring the 7.5% stake.

If they do manage to get two of their own people on the Agrium board, the situation could end up like a coalition government, with key, contentious decisions almost never getting through, in an attempt to unlock the proposed value.

The question though is, whether value has indeed been lost. A simple look at Agrium’s share price 10 years ago shows a growth of almost 83% over the past decade, when inflation adjusted S&P 500 total return was around 46%. So what value is Jana looking to create? Is this value really quantifiable? Must one take their past track record with McGraw Hill and others as a benchmark? Is it really worth taking the trial-and-error risk of shuffling the board with one of the world’s largest fertilizer makers? Well, the shareholders’ opinion is all that counts and the end is indeed nigh.

That said though, the activism in shareholding is what is most appealing in these proceedings. Not very long ago, I had the opportunity to learn about the annual shareholder meeting of a certain company, the name of which we will keep anonymous. Before I start off describing the story, I should maybe make it clear that this was a shareholder meet for a small firm, not a Fortune 500 place. Nonetheless, the inevitable comparison with the on-going Jana-Agrium fight did happen, vis-à-vis shareholders’ role in capital markets.

So the first thing I found funny with this firm, was that the average age of the handful of shareholders present in the meeting was over 70, at least. When casually asked why this was so, an officer of the company said that in general it is the retired community that invests in stocks! Secondly, there was a piece of material information – a problem that could potentially hurt future prospects,  that had not been universally and formally disclosed. Inadvertent leaks were all that was out. When quizzed about it, the issue was very cleverly skirted. The shareholders were not very persistent and the fact that the question went unanswered did not raise any red flags, whatsoever. The board has been made up of 4 people, who have been on the board, since the company went public. Maybe a couple of people kept getting added and subtracted, but the same 4 usual suspects remained throughout. Not much is known about them, or what they do in the company. At the meeting, the directors were ‘elected’ and the resolution passed, all within 15 minutes, with the handful of people in the room too busy with their cup of tea, to even raise their hands if they dissented. A couple of harsh questions were asked, which got long-winded non-answers in response. These responses were not counter-questioned.

The stark contrast with Agrium did come to the fore. At the end of the day, benefiting from an equity investment lies in the shareholders’ hands. If I want my money to work for me, I would need to put in the effort that is required. Blaming the management for poor leadership and mismanagement is all well. But it is finally in the shareholder’s best interests to set things right if she wants to and indeed, corporate governance mechanisms do exist that enable her to do so. It’s just that these methods are disregarded. In most cases, shareholders are unaware of their rights. And it is not very often that boardroom battles end up in the living room, as has been the case with Agrium. The hope though, is that this should be an essential lesson to every shareholder. That regardless of whether the firm whose shares you hold is worth 2 million or 200 billion, the power to set things right does exist in your hands if you wish to exercise it.