http://blogs.ft.com/nick-butler/2013/10/08/shareholder-activism-a...

http://blogs.ft.com/nick-butler/2013/10/08/shareholder-activism-arrives-in-the-energy-sector/?

Carl Icahn’s purchase of a 5 per cent stake in the Canadian company Talisman Energy marks the entry of activist shareholders into the energy business. Could it indicate the beginning of a revolution?

Activist shareholders have a bad reputation, particularly in Europe where they are seen as asset strippers who pull apart good businesses for a short-term gain. That can happen but they can also be very productive in forcing companies to examine very hard what they are doing with their shareholders’ money.

From outside, it must be hard for ordinary shareholders to imagine life in the corporate world. If they saw up close the behaviour of some boards, they would be shocked by the level of corporate luxury. Private jets, first-class travel (including for their partners), lavish homes for directors and senior executives – all provided net of tax – and corporate entertainment on a ridiculous scale, and then of course executive pay which never seems to be tied to the return to investors or the pay of staff down the line. A former senior executive in the energy industry described it to me last week as a “lifestyle choice”. The sector is not unique – I heard the other day about the chief executive of a medium-sized media business who had taken home $10m in less than two years, despite the company’s mediocre performance.

But in the energy industry the numbers are bigger. Executives can earn tens of millions of dollars even as stock prices fall. In the sector this sort of greed is just part of the story. The other issue is the tendency to reinvest. For shareholders the jam is always promised for tomorrow. Reinvestment enhances size and size of course warrants an even greater reward for management. That leads to investment in what are bravely called “frontier projects”, where the returns are decades away and usually dependent on ever-rising prices. Shell’s ill-considered venture into the Alaskan arctic springs to mind.

This is not to say that energy companies should not be adventurous or get involved in research and development or should be exclusively short-term. Such activities are justified and necessary. But a good company balances today, tomorrow and the day after tomorrow. Good companies also demonstrate exactly what is being spent and are ready to explain why. When shareholders are engaged, they can be persuaded. The real damage is done by boards and management who treat shareholders with contempt. A few platitudes and a box of sandwiches at an annual meeting are not enough. That is the fertile ground in which Mr Icahn thrives.

For many years the energy sector has avoided the attention of activist investors. The scale of the capital required to influence corporate behaviour has been seen to be just too great. Talisman– like Hess, another US business currently subject to activist scrutiny – is a relatively small company compared to the majors. But Mr Icahn’s action offers a warning. Given the undervalued nature of Talisman’s assets he could easily double his money. Existing shareholders will also benefit which is why the shares have risen sharply after months in the doldrums.

It is not impossible to imagine a group of activist investors coming together to shake up some of the much bigger players in the business. Companies will see this coming and the sensible will adjust in good time. The rest will get what they deserve."