C.Gardell (Cevian Capital): “The fundamental principle of capitalism is that if there is incompetence, it should be challenged”

Leaders League. More than 650 activists were indentified in 2016, how do you see the rise of activism in recent years?

Christer Gardell. I see it as a natural development. Most of the capital is becoming more passive, it is turning more and more into index funds leaving a vacuum for more active capital. The problem with the movement towards passive index capital is that type of capital is not putting enough pressure on companies to perform. Therefore, I think that vacuum sort of explains the rise of activism.

Do you think there are too many activists campaigns in Europe?

I think that an activist campaign is a concept with different approaches within the 650 that have been identified. Activism has a natural tendency that we can find among these campaigns. However, this number sounds a little bit too high. As the most experienced activist in Europe, we have 10 to 12 positions in our portfolio, and that’s a full-time job for our team. Trying to fundamentally improve the performance of a business and tackling issues like the level of directors’ pay, at a shareholders’ meeting say, these are two very different campaigns. This is what we have been doing with Volvo for eleven years now, trying to fundamentally improve the performance of the underline business. They count as two activist campaigns which are very different in nature.

Do you perceive European activists as less agressive than their anglo-saxon counterparts?

Activism is very difficult in the United States due to legislation, which is very protective of management and the board. The shareholder is definitely in a weaker position, and if he has a different view to that of the board and the management, there is no other option but to go hostile. In Europe, in general, legislation is much more favorable to shareholders. It gives them a stronger influence. In most cases ‒ notably in Sweden, widely considered the most shareholder-friendly country ‒ the nomination committee, the party that proposes the slate forum for the board of directors and the shareholders meeting, that committee usually consists of representatives of the main 45 shareholders. It’s an external committee. In the USA for example, that would be something completely controlled by the chairman, and so, would find it very difficult to exert influence. The defense mechanisms built into European law are relatively porous. The fundamental principle of capitalism is that if there is incompetence, it should be challenged and should be replaced by competence. In most of the cases, we would join the board of directors ourselves to work from within with the board and the management. You don’t ever want a situation where it is difficult to challenge incompetence or poor performance. Clearly, that’s a bad set up. That’s an environment where it is more difficult for activists, then they tend to take a more aggressive approach. We prefer to work with the board and the management through a long-term strategy. Obviously, all of this requires a great team, like in football. If a player isn’t playing well, you substitute him with another.

You are a long-termist investor, as you invest from five to seven years in companies. What’s the thinking behind this?

It is more five years than seven. We intervene where fundamental change is required to take the performance from a lower level to a higher level, and that takes about five years. Our capital issue will always be engaged in change. If there is no change, then passive capital comes in, and we move on at the same time. Our job is to be an active shareholder, not a passive one.

What do you think about activist investors who pretend to be “long-term” investors?

I don’t know that many large activists who are indeed long-term investors. First of all, to be a long-term activist requires long-term capital. To achieve long-term change, you can’t have a structure where investors can take out money after a month. Long-term involves faith, stability and patience. If you look inside the activism community, you will see that long-term capital and short-term capital are two different businesses. Real activism reaches out over the long term, otherwise it is just a campaign.

Activist managers are sometimes perceived as “vultures,” but their aim remains to enhance company value in the interest of both employees and shareholders. Do you see yourself more as an entrepreneur or as an investor?

Actually, we are both. The fundamental principle is to work as a shareholder, for all the other shareholders. I don’t think there is a conflict of interest between shareholders and other stakeholders. If you are successful in transforming a business, it’s good for suppliers, employees and shareholders alike. For us, the important thing to achieving the right strategy, is to understand how to run a business from the inside. As shareholders, our role is balance interests in the most optimal way. It is, by definition, impossible to maximize all the interests, otherwise the business doesn’t work!

What advice would you give a rookie activist?

First of all, you need to be willing to work with few positions in the portfolio. The key for a new activist is to work on the capital structure. It is so easy to give up and to take short capital, but that would be a mistake. This is linked to the length of the fund-raising process. You need to have investors who understand your strategy. When we started in 2001, there was no long-term capital available in a paid-up structure. The only type of structure to do so was a private equity one. We never gave up on long-term capital building, because we wanted to create fundamental change.

If you had one message for European politicians, what would it be?

I think they should view activism as something good in that environment where there is a massive force attracting all capital into passive index capital. If we look forward, and take the hypothesis to its extreme, it would eventually kill capitalism and the market economy. It would be a very destructive force in society. Active ownership is a necessity for our type of capitalism to work, and a prerequisite to economic growth.

Interview by Yacine Kadri