The billionaire gunning for ethical investment

Forget Gina Rinehart and Fairfax. If you really want to see how a billionaire can use a strategic stake to push for a change within company, keep an eye on Tasmanian timber group Gunns, which this week gained a key new shareholder in Singapore-based, New Zealand-born Richard Chandler.

Chandler, who is valued at about $4 billion, has put $150 million into Gunns, immediately making him one of the company’s biggest shareholders. Chandler’s right-hand man, Allan Kelly, has the job of “catalysing” the company’s long-delayed Bell Bay pulp mill.

As Gunns investor and business commentator Stephen Mayne said last week, Chandler is clearly bargain hunting. He can see the opportunity to take a big stake in Gunns, agitate for change, get the mill built and make a handsome return.

The wealthy shareholder activist is a common figure in markets around the world and their modus operandi is similar – buy a strategic stake, get the ear of management and/or a board seat and start pushing for change.

One of Australia’s most successful versions is Pratt family member Alex Waislitz, who runs the family’s Thorney Investments arm.

In recent years, Thorney has taken stakes in road safety camera operator Redflex and labour hire firm Skilled Group and engineered board and management changes.

He was also involved last year in a big fight at property developer Folkestone, which saw Thorney battle for control of the company with former Mirvac Group managing director Greg Paramor. The former Mirvac man was eventually successful, but not before Thorney forced Paramor to increase his offer.

The activist investor

Internationally, one of the best-known activist investors is US billionaire Carl Ichan.

Valued by Forbes at $13 billion last September, Icahn is legendary for forcing change at companies he invests in. Typically, the play works something like this: Icahn hunts for a poorly performing company, takes a strategic stake and then starts pushing for the group to be restructured, broken up or make some other change (like a share buyback) that increases investor returns.

Like Waislitz, Icahn usually wants some influence over the board and management. Unlike Waislitz, Icahn regularly uses the media to wage his battles. Recent targets have included US broadband supplier LightSquared, refining group CVR Energy, defence group Oshkosh and health company WebMd.

Icahn offer encounters bitter resistance to his restructuring calls from the managers of the companies he targets. But investors love it and have even coined the term “The Icahn Lift” to describe the share price rise that his targets enjoy after he invests.

Take CVR Energy – on the day Icahn’s investment was announced in January, the stock jumped 4.5%.

Obviously activist investors are attracted by the opportunity to drive big returns – often double or treble their original investment, if they can really turn a business around.

But there is something else driving Richard Chandler. He is a unique type of shareholder activist who believes that a key way to increase investment returns is to improve the ethics and governance of a company.

The Chandler philosophy

Chandler’s philosophy was laid out last year when he released a 40-page paper called Corporate Governance and National Prosperity.

In it, Chandler explains his long-held belief that investment returns can be generated by forcing investee companies to improve their corporate governance practices.

“As a student at Auckland University in 1982, I wrote a Masters of Commerce thesis entitled Corporate Directorship Practices in New Zealand Listed Public Companies. This academic background, together with over 20 years experience investing in developing economies provides a unique foundation to promote the principles of trust based capital markets which are so essential to accelerating prosperity in our global village,” Chandler writes.

“Investors have an important role in ensuring accountability by company management for their financial and ethical performance. Responsible investors will engage corporate governance issues where they encounter them, as an intrinsic and necessary component of professional investment management.”

Interestingly, Chandler has already made the timber sector a specific target for his brand of ethical shareholder activism.

In the middle of last year he became one of the largest shareholders in Sino-Forest, which is listed in Canada and runs timber plantations in China, just weeks before its shares plunged, following revelations that it had fabricated the existence of a wood-chipping operation and overstated the size of its timber holdings in China.

Chandler is now pushing for the removal of key executives at Sino in a bid to restore the value of his investments. He won’t find those sorts of problems at Gunns, but the company has not been without its issues.

In December 2011, a few months after Gunns posted a loss of $355 million for 2010-11, former executive chairman John Gay was charged with insider trading over the sale of $3 million worth of Gunns shares in December 2009, three months before the company revealed a 98% fall in half-year profits.

That matter is ongoing, but its very existence is unlikely to please Chandler given his history.

His most prominent episode of ethical activism came in 2003 when he and his brother Christopher built a 14.9% stake in conglomerate SK Corp. The company’s share price had collapsed after a $US1.2 billion fraud scandal that saw chief executive Chey Tae-Won and nine other executives convicted and jailed.

When Chey was released from prison and returned to run SK Group, the Chandler brothers launched a three-year campaign to oust the former CEO.

They were unsuccessful and Chey stayed. But improvements to SK Group’s governance practices saw the share price increase five-fold and the brothers make more than $US700 million.

Gunns management has welcomed Chandler’s arrival and appear to be very much on message.

“Having this organisation as a partner in the project, it provides not only credibility for the community but they’ll understand the requirements of governance and transparency are held in the utmost level within the organisation,” CEO Greg L’Estrange told the ABC last week.

Governance, transparency… Chandler has already got management heading in the right direction. Shareholders will be hoping he can take the company’s share price in the right direction too.