So what role did ValueAct, Rolls- Royce’s largest shareholder, have in the surprisingly sudden departure of John Rishton as the engineering group’s chief executive last summer?
The chronology of events looks compelling. The American activist investor started taking an interest in Rolls-Royce in 2013 and began having meetings with the company and with Mr Rishton.
In early 2014, the wheels started to come off at Rolls with the first of what would be five profit warnings in under two years. That first warning was the most devastating, though, both in shredding the market capitalisation and because it came out of what was apparently a clear blue sky.
Fifteen months later Mr Rishton had issued three profit warnings, each time wholly wrong-footing the City. As events have turned out, when it was announced in April 2015 that Mr Rishton was leaving, he and others in Rolls’ high command may have had an inkling that a fourth was coming.
Mr Rishton left the company on July 2 last year. On July 6 Warren East, previously a part-time Rolls’ director and in his second day in the job as its chief executive, was forced to issue Rolls’ fourth profit warning in 18 months. By July 29, ValueAct had swept up enough shares to out itself as Rolls’ largest shareholder, with a 5 per cent stake.
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Rolls and ValueAct claim privately that the latter had no role in agitating for the departure of Mr Rishton, though ValueAct’s generous praise of Mr East since is an indication of which chief executive it prefers.
What is clear is the depth of ValueAct’s influence at the company. Having increased its stake to 11 per cent, it has muscled its way on to the board with the appointment of Bradley Singer, its chief operating officer, as a director.
Rolls has faced a multitude of issues, which, as it confessed in its fifth profits warning in November, will cut 2016’s profits by half.
In civil aerospace, by far its largest market, two of its most important engine programmes for the next 30 years have gone into manufacturing production late and consecutively. The Trent 1000 for Boeing’s 787 and the Trent XWB for Airbus’s A350 coming one after the other has meant that Rolls has been in continual industrial ramp-up phase, the stage when it is making the least money after years of development spending. It was hurt, too, by Airbus’s decision to slow down production of the A330, for which Rolls makes the Trent 700, a mainstay of its stable.
At the same time, demand for Rolls’ marine engines for the oil and gas industry chugged to a halt because of the collapse in the crude price. Misreads in engine demand in the private business jet market also have hurt.
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Now, amid shareholders’ distress about operational mis-steps, the company has left itself open to fundamental questions of corporate governance.
The appointment of Mr Singer as a director, speaking for 11 per cent of the shares, sets a precedent, a threshold at which any other shareholder might demand boardroom representation. It also raises the question of when or whether ValueAct might be ejected from the board. An agreement has been signed, which says that the ValueAct director must resign if the stake falls below 7.5 per cent. Yet there appears to be no mechanism for removing the director if ValueAct becomes either a disinterested or hostile party, which it could be while still retaining a 7.5 per cent stake.
Queries also have been raised over Rolls’ granting access to Mr Singer to its crown jewels, the proprietary knowledge around its technology and intellectualy property. He has been appointed to the company’s key science and technology committee. Ian Davis, Rolls’ chairman, says there is no issue here as Mr Singer is bound by confidentiality clauses, but that does not alter the fact that a man of whom Rolls engineers know nothing will now be party to key information.
“The appointment has been made in good faith,” Mr Davis said. A verdict on that statement may be made at the company’s annual meeting in May.
Superjumbo blow
Q&A
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What is an activist investor?
Activists are powerful minority shareholders who demand change and often seats on the board of companies they regard as undervalued. They often seek to unlock corporate assets by pressuring companies to split up or sell and spin-off parts of the business.
Who are they?
The ranks of activist investors include private equity firms, hedge funds and wealthy individuals. The big names in the United States are Carl Icahn, Daniel Loeb, Nelson Peltz, Bill Ackman, David Einhorn, Paul Singer, Barry Rosenstein and Jeffrey Ubben. There is a growing band of “occasional activists”, mainly institutions, who get involved only for a particular campaign, sometimes teaming up with the regular activists.
Are activists good or bad for companies?
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There was a time when activists were regarded as short-term, smash-and-grab asset-strippers, engaging in bitter proxy fights and providing a huge distraction for company boards. Today, they are regarded increasingly as potential allies with ideas for change at companies that are regarded as being set in their ways. In some cases, institutional investors are inviting activists into stocks they think are undervalued.
Are they successful at what they do?
Last year, activists had 60.7 per cent of their demands realised, according to Activist Insight, which compiles data on the sector. That did not necessarily translate into financial rewards or better returns for shareholders. Last year, activist-targeted stocks fell 8 per cent, compared with gains of 1.4 per cent for the S&P 500. In January, activist funds fell a further 6.1 per cent.
So why is activist investing increasing?
Put simply, the rewards can be spectacular when they get it right. In 2014 Bill Ackman and his Pershing Square investment vehicle reported net returns of 40 per cent. There are also growing demands for corporate boards to be made more accountable and activists are among the best at achieving this.
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Is activist investing spreading from the United States to Europe?
Yes. Activists are looking around the world for targets, but this expansion has been spotty. Last year 58 companies in the UK faced a public demand from activists, up from 44 in 2014 and 54 in 2013, but down from 60 in 2012.