USS Investment Management still fundamentally believes in Akzo Nobel’s [AMS:AKZA] future even after losing confidence in its supervisory board, but only if the chairman leaves as planned in April and is adequately replaced, according to the USS’s co-Head of Responsible Investment Daniel Summerfield.
Akzo Nobel announced this week that it would nominate former Maersk [CPH:MAERSK-A] and Carlsberg [CPH:CARL-A] CEO Nils Smedegaard Andersen as its next chairman at the forthcoming AGM on 26 April.
He seeks to replace Antony Burgmans, who was publicly criticised by USS and others for rejecting unsolicited offers from PPG Industries[NYSE:PPG] in March and April 2017, and voluntarily indicated in July that he would resign at the end of his term.
The case made headlines when activist Elliott Management took the fight to Akzo, challenging the board to take the offer seriously and questioning the rationale behind its rejection and lack of engagement.
As the management company of the UK’s largest pension fund, USS Investment Management also lost confidence in Akzo’s board over the PPG decisions and its ensuing treatment of investors, Summerfield told Activistmonitor.
“We still fundamentally believe in the business [Akzo] and that there is light at the end of the tunnel, mainly because the board is going to change, with the retirement of the chairman in April,” said Summerfield.
USS was consulted in advance of the announcement of Andersen’s nomination and intends to meet him in due course, but it has not yet decided whether to support the candidate, he indicated.
“As with all board appointments, we will reflect carefully on his skill sets, background and experience in reaching a decision on his appointment at the forthcoming AGM,” Summerfield said.
USS’s stewardship model
Established in 1975 as the main pension fund for universities and other higher education institutions throughout the UK, USS has assets under management of over GBP 60bn and represents around 390,000 members.
Its concentrated portfolio of about 120 high conviction stocks means USS only invests in companies where it has confidence in the management and strategy, said Summerfield.
It manages approximately GBP 20bn in public markets equities via two “global research” portfolios and two “global factor” portfolios. USS’s five largest equity investments are Royal Dutch Shell [LON:RDSA], Roche [VTX:ROG], Samsung [KRX:005930], Tencent [HKG:0700] and Credit Suisse [VTX:CSGN], with Akzo coming in at 18th largest, as of 30 September.
“We don’t invest in them [companies] because we want to change management or we want to change the strategy, that’s more of an activist approach,” he said.
But the investment manager does take its stewardship responsibilities seriously and seeks to make full use of its rights, from AGM voting through to direct legal action, and even director nominations, said Summerfield.
For example, if USS votes against a company’s remuneration report at AGM and the problem is not addressed by the next AGM, it reserves the right to vote against the individual directors who have responsibility for remuneration at that AGM, he said.
At the other end of the scale, USS was lead plaintiff in a class action corruption case against Petrobras [BCBA:PESA] which recently settled for USD 3bn – the largest securities class action settlement in a decade and the largest settlement ever in a class action involving a non-US issuer.
Selling the stock would be a last resort, although one USS is willing to take, Summerfield said.
While other Akzo shareholders – such as Tweedy Browne – have already publicly sold the stock, USS believes new leadership would help to restore its confidence in the board, he said.
PPG offer and Elliott’s agitation
It was Elliott that initially “set the cat amongst the pigeons” with its condemnation of the board’s lack of engagement with PPG and called for Burgmans to be replaced.
USS was moved to voice its own similar view in a 28 April statement calling for “meaningful and constructive dialogue” between Akzo and PPG on a revised offer submitted by the latter.
The pension investor escalated its stewardship efforts to nominating a candidate for the supervisory board at Akzo’s November EGM – an unprecedented move for USS, said Summerfield.
The candidate Eric Meurice was eventually withdrawn because the company put a very strong candidate against him, with a higher voting threshold, but USS is still adamant there must be change at the top, he said.
Akzo’s CEO at the time of the PPG bid, Ton Buchner, had already resigned in July due to health reasons.
Just a week later in a statement announcing Buchner’s replacement, Burgmans also announced he would step down as chairman when his term ends after the company’s April 2018 AGM, “barring any exceptional circumstances”.
Akzo has also put its Specialty Chemicals business up for sale, and the company has explored a merger with Axalta [NYSE:AXTA] but failed to reach an agreement.
Further consolidation in the sector would be inevitable, said Summerfield, but he was unaware whether potential buyers had been put off by the board’s treatment of PPG.
“I think a change in chair, which will happen in April, may allay some people’s concerns. There was speculation that the chairman was the major obstacle (to a deal).”
Working alongside Elliott
The involvement of Elliott – one of the world’s most high-profile activists – did enable USS to push its case further than it would have otherwise and enabled it to participate in different forums, Summerfield said. “One has to give (Elliott) credit for doing a lot of the ground-work,” he said.
For instance, USS would not have taken the company to court as Elliott did because it can be very resource and time intensive, he said.
When Akzo denied Elliott’s request for an EGM on the matter of Burgmans retaining his chairmanship, Elliott took the matter to the Netherlands’ Enterprise Chamber commercial court and mentioned USS’s sympathies with its view in pre-court filings, Summerfield said.
USS was invited to the hearing and accepted, asking the court to consider installing its own appointees to the board in order to clear the air. Both Elliott’s arguments for a new EGM and USS’s for new directors were rejected, but the court urged Akzo to repair relations with its investors in general.
However, investors need to be careful not to contravene in-concert party regulations when aligning themselves with activist or other shareholders, he said, reiterating that “there was certainly no alliance or formal collaboration” with Elliott.
On the link between institutional investors and activists more generally, Summerfield believed it was still early days in Europe and would be judged by fund managers and corporate governance specialists on a case by case basis.
“It depends on the activist manager, and what their background and objectives are. Some investors will steer very clear from activists, others will want to hear what the activist view is. We are keen to hear other investors’ views as long as we adhere to market rules.”
by William Mace in London
Five facts you need to know about USS Investment Management
- USS Investment Management is the manager of the Universities Superannuation Scheme.
- USS has assets under management of over GBP 60bn, including GBP 20bn in equities, and represents around 390,000 members.
- It holds around 120 conviction stocks and is not activist, but does employ stewardship policies.
- USS has a Responsible Investment team, who uphold its commitment to being “an active and responsible steward” of its members’ assets.
- Its equities investing team also integrates ESG factors into its due diligence process to ensure that extra-financial factors play a role in its investment decisions.
AKZO NOBEL/USS EVENT TIMELINE
28 Apr 2017 – USS declares 1.28% in a statement that also calls for Akzo’s board to engage in constructive dialogue with bidder PPG Industries.
24 Jul 2017 – USS nominates Eric Meurice for a supervisory board seat.
25 Jul 2017 – Chairman Burgmans announces his intention to step down from the board at the completion of his term.
16 Aug 2017 – Akzo and Elliott agree to suspend all ongoing litigation for at least three months.
18 Oct 2017 – Akzo’s board says it does not support Meurice’s appointment to the board.
26 Oct 2017 – USS withdraws its nomination of Meurice.
05 Mar 2018 – Akzo nominates Nils Andersen as supervisory board member with the intention of electing him as chairman.