US hedge fund Saba Capital has again failed in its latest attempt to take over an investment trust for its own ends. Last week, shareholders in Edinburgh Worldwide (LSE: EWI) rejected Saba’s proposal to remove all six independent non-executive directors and replace them with Saba’s three nominees. Out of the total votes cast, 53% of shares were against the resolutions – a figure that flatters Saba because it includes its own 30.7% stake. Just 7% of non-Saba shares cast backed the hedge fund’s plan.
Yet whatever your views on Saba Capital and the ambitions of its aggressive founder Boaz Weinstein, you can say one thing in its favour. There’s no doubt this whole saga has been tremendous for shareholder democracy in the UK.
In praise of hedge fund activists like Saba
Global hedge-fund managers are driven by profit above all else. In a sector known for cut-throat competition, they have to be. Managers need to justify their high fees. Hedge funds manage around $5trillion worldwide, split across a handful of large managers and thousands of smaller players, all fighting for assets. Investors want to see results or they will pull their money and take it elsewhere.
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This dog-eat-dog nature means hedge-fund managers often turn to activism. If your investment is underperforming, the best hope for improving short-term performance is to shake things up and install new management who will help you achieve your goals.
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If the changes unlock value, all shareholders should benefit. And other investors don’t have to stay along for the ride if they don’t want to. The system is designed to give shareholders, both large and small, the ability to cast their vote and have their say – even if the very nature of this process means those with the biggest stake ultimately have the most input.
However, something has gone terribly wrong with UK shareholder democracy over the past two decades. The shift away from individual shareholdings to large platforms and nominee shareholdings has muddied the water between what shareholders are entitled to and what they expect.
This is not entirely the fault of large platforms. Individual investors have been complacent during this shift and so have boards. Some of the conversations I’ve had with investors, analysts, brokers and (the more active) board members over the past two years have brought to light some shocking revelations about the lack of interest shown by some boards and managers towards their investors. Saba’s arrival has given these boards a jolt.
How Saba is restoring shareholder democracy
Following Saba’s initial attack on seven investment trusts, including Herald (LSE: HRI) at the beginning of last year, the Association of Investment Companies (AIC), the industry body for investment trusts, called for changes to company law to ensure platforms are required to exercise shareholders’ right to vote. The call forced some long-overdue changes by platforms. Shareholders should be prompted to vote on every occasion, whether or not there’s an activist at the door. They should be encouraged to hold boards and managers of all funds, trusts and individual companies to account.
Saba’s activities have forced boards and investment platforms to rethink their approach. Technology is making it easier for shareholders to exercise their voting rights without substantial cost. Turnout for Edinburgh Worldwide’s recent vote was around 70%, an all-time high. Many of those who voted will have done so for the first time and will now be more likely to vote in the future. Sources tell me investment companies are now making a concerted effort to improve communication with shareholders. This is a great outcome for all shareholders, but it should also put managers on notice. Many investors now understand their rights for the first time. That is a great victory for shareholder democracy.
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