Loeb wrote to another CEO, Irik Sevin of the US company, Star Gas Partners,"I have known you for many years. It is time for you to step down from your role as CEO and director so that you can do what you do best: retreat to your waterfront mansion in the Hamptons where you can play tennis and hobnob with your fellow socialites." Sevin resigned soon afterwards.
This happened ten years ago, but there's a parallel with the recent ousting of Philip Clarke, Tesco’s (TSCO) former CEO, where large shareholders had been pressing for change for some time. A tired brand, a strategy that's run out of road, a profit warning, a company that could do better and it's time for what Tesco calls (in classic supermarket-marketing-speak - note the words "new" and "fresh") "a new leader with fresh perspectives and a new profile".
There is a difference, though. Tesco hasn't yet said how things will change; perhaps they don't yet know. In contrast, activist shareholders normally go in with constructive proposals on how to improve the company - not that they are always right.
These are examples of shareholders doing what they're supposed to do: holding company boards to account. But there's a disadvantage to this: it takes time. Fund managers can have up to 100 stocks in their portfolio so they can't afford to dwell on any particular company for too long. If companies appear to be losing their way, why waste time on them? It's much easier to sell. After all, fund managers are themselves judged on how much they back winners and avoid losers. The residual shareholders are effectively self-selected and so more inclined to back the company board.
Many shareholders won't get involved anyway. Those that rely on automated trades, such as passive funds, index trackers and some hedge funds don't need to. It's not for nothing that they charge low fees. Sovereign wealth funds and foreign investors, which now own over half the UK stock market, tend to focus on the larger companies. So the institutional investors that do engage with underperforming companies are not as many as might initially appear.
But what of companies that appear to be performing well? The natural tendency for fund manager shareholders is to kick their tyres and move on. Typically, their checklists include strategic clarity; management strength; competitive advantage; sound risk management; good communications and effective governance. Pay is one aspect of this, so why get too concerned when the management team is doing what's required of it and there are so many other issues to worry about?
These sorts of issues help to explain why executive pay tends to outpace others. The argument is that pay influences behaviour and if company boards err on the side of generosity, it will be to maintain a good relationship with senior executives. The same goes for the remuneration consultants they hire to structure pay to reward success and avoid rewarding for failure. The same also goes for shareholders, who after all have invested in the company because they believe it will succeed. Everyone wants to pay well and fairly - but exactly how that is defined is open to interpretation. And this is where disagreements arise, as it did recently with a massive package for the new CEO of Burberry (BRBY). The ongoing spat at Sports Direct (SPD) is more subtle. Here, the board (and in fairness, some shareholders) of a company with current strong sales and profit growth have been made to look foolish by a palpable lack of expertise in pay and governance.
Shareholders can advise; they can lobby and influence; but when push comes to shove, their only real sanctions are fight or flight: either to vote down resolutions and change the directors or to sell their shares. Loeb took the fight to Sotheby's, where peace has broken out, at least for the time being. A couple of months ago, Loeb and two colleagues joined the board and Sotheby's agreed that he could increase his stake to 15 per cent. A poacher turned gamekeeper, Loeb is now saying that he hadn't appreciated how strong Sotheby's had been in auctioning Chinese art, modern art and impressionists, which is some admission. Loeb’s money is where his mouth is, and now he's in the same place too. But only time will tell whether how much of a difference he'll make.
