Dave Woollam. Picture: SUPPLIED

Related articles

SHAREHOLDER activism is often a mug’s game, especially when it comes to corporate malfeasance. When a company does wrong and you point it out, the result is likely to be a fall in the share price, which does no good for your interests.

So when you know a company has blundered and is not being completely honest about it, your best move is to quietly sell, before anyone else notices. Is there anything we can do to promote more public activism?

Sometimes activists take on a company regardless. A good example is Dave Woollam’s battle with the Lewis Group. The former financial director of African Bank and BoE has become something of a campaigner on credit providers’ abuse of customers.

In July he published a lengthy critique of Lewis’s accounting practices alleging significant overstatements, largely as a result of "upfronting" earnings for long-term agreements. He had even recorded mystery shopping exercises that revealed an embarrassing lack of due process by Lewis’s sales agents.

Lewis’s response was a vehement defence of its practices, but Woollam’s allegations led to a 40% fall in the share price that month.

He is not alone in being willing to take on such battles.

Theo Botha is another shareholder activist who has picked fights, usually over executive remuneration issues.

Botha tasted first blood over Louis Shill’s Sage Group in 2002. As a small shareholder, he was flabbergasted when he realised the company had not fully disclosed offshore exposures. So, he carefully analysed the insurance group and its misstatements and made them public, contributing to the swift collapse of the company.

Since then he has been the polecat of many annual general meetings, picking out conflicts of interest and remuneration policies that don’t make sense.

Apart from such activists, it is often left to financial journalists take up the cudgels. Financial Mail deputy editor Rob Rose, for example, has been campaigning about abusive insurance practices by the likes of Lewis Group, JD Group and others for several years. New draft regulations have just been published by the National Treasury to rid abuse from the system, a move Rose’s journalism helped to advance.

While journalists may have an interest in such work, given the publicity and readership such disclosures can engender, I know from my years in the media that an appetite for it is the exception rather than the rule. Journalists, like any of us, would rather avoid conflict if possible.

Campaigning, investigative journalism takes more than a desire for readers. To that must be added a sense of responsibility to do something about abuses, even though the rewards are often relatively trivial.

So, how do we promote such activism, given that eternal vigilance is the price we must pay for well-functioning capital markets? US hedge fund managers have pioneered short activism — taking a short exposure to a company before you reveal all its sins.

Bill Ackman has been waging a war against Herbalife, the nutritional supplement company, for years. First he took a $1bn short position, then rounded on the company with allegations that it is a pyramid scheme peddling products that don’t work. He’s had mixed success, but the strategy is gaining traction. Short activists are springing up around the world, despite concerns from regulators.

As far as I can see, short activism is a good way to improve market efficiency by providing incentives for skilled analysts to look for the bad news and not just the good. Just like long investors, they must do their homework properly.

Locally, we have plenty of scope for such strategies. Shorting is quite feasible, thanks to the growth of derivatives, although only larger companies tend to have short stock available. There are several hedge funds deploying long-short equity strategies, but to my knowledge, none has gone public with the reasons for their negative views so far.

Fundamentally, the culture of our capital markets is to make peace and play nicely. Unfortunately, that makes it easy for those out to abuse investors’ trust, so here’s hoping more subversive rebels step up.