Shareholder activism, particularly in the energy sector in North America, is set to reach record levels this year and continue into 2014, as activist hedge funds spur overhauls of boards, force asset sales and prompt changes in corporate leadership, according to a report by Moody’s Investors Service.
Years of accumulating cash, record low borrowing costs and the past successes of campaigns led by activist shareholders are further fueling activism, according to the report by Moody’s senior analyst Christian Plath.
‘This year the total number of activist shareholder campaigns in the US and Canada looks likely to exceed 2012’s record levels, due to record levels of cash on corporate balance sheets, a ready supply of inexpensive debt and activists’ own success in attracting investment capital,’ the report says.
The energy sector is particularly prone to increased shareholder activism because energy firms generally have assets that could be spun off to increase returns for investors and the potential increases in income due to the ongoing shale oil and gas boom in North America, the report says. The sector also has a more ‘entrepreneurial culture, which can lead to weaker checks and balances on corporate leadership and less discipline around executive compensation practices.’
So far this year, several high-profile activist shareholder campaigns have already hit the energy sector. Yesterday, the chairman and chief executive officer of SandRidge Energy, Tom Ward, was fired and succeeded by the company’s chief financial officer amid shareholder pressure.
US oil company Hess Corp last month ended a lengthy, particularly bitter proxy fight with shareholder Elliot Management by agreeing to name three of the activist investor’s nominees to its board. Drilling rig contractor Nabors Industries is locked in a fight with its shareholders after they voted against re-election of two board members and the company refused to acknowledge the vote earlier this month.
‘Activists have forced beneficial changes, such as improved corporate governance practices and greater financial and capital discipline,’ Plath says in a press release. ‘But activism has also increased the risk of shareholder-focused strategic and financial policy changes, new or expanded share repurchases and divestitures of cash-generating assets that could harm creditors’ interests.’
‘We don’t expect shareholder activism to quiet down anytime soon,’ Plath says. ‘Given the favorable climate for activism and the energy industry’s unique characteristics, the sector is likely to remain fertile ground for activists through this year and into next.’
