Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 559

Board games: two hidden risks for stock pickers?

Simon Mawhinney has experienced a takeover or two in his time. Allan Gray, the investment firm he joined as an analyst in 2006 and now heads up, has built its track record on taking a contrarian stance and buying cheap equities. Because low valuations often attract buyers, takeouts are a common exit for Allan Gray investments whether they like it or not.

Unfortunately, Mawhinney often lacks confidence in those deciding whether a takeover should happen, and at what price. “I’m not saying this is the norm”, he starts, “but there are instances where boards have a completely distorted view as to what a company is worth”.

You might expect Mawhinney’s main gripe to be with directors letting buyers steal companies for too little. But he’s just as scathing about boards that expect too much from buyers. He sees Ramsay Healthcare (RHC) – which saw a deal with Kohlberg Kravis Roberts (KKR) collapse in September 2022 – as a prime example.

“You can't expect someone to take over a company without accounting for potential downside risks in the price somehow. Ramsay wanted to extract every single last dollar from the would-be buyer. By the time there was sort of some agreement, things had changed, and the deal fell over. Look at what's happened to the shares since.”


Source: Morningstar.com

Things can, of course, go the other way. A few years ago, Allan Gray were the biggest shareholder in construction group UGL. Mawhinney says the board’s expectations were “frighteningly low” here, no doubt influenced by a mining downturn and project write-offs that had battered the shares.

“CIMIC ended up buying that business for around four times earnings. At times like that, you would expect boards to take a long-term view of the world and not be preoccupied with short-termism.”

But Mawhinney thinks boards have strong incentives to do otherwise. Chief among these is the desire to avoid criticism – or a court case – from shareholders obsessed with getting a quick return. This can make lowball offers look more attractive than they really are, a situation Mawhinney sees written all over Nationwide Bank’s bid for Virgin Money in the UK.

“Nationwide’s offer valued Virgin Money at 0.65x net tangible assets. The cheapest major bank in Australia trades well above 1x, but the board probably felt they needed to recommend the offer because it was 40% above Virgin Money’s prevailing share price. But just because it's a 40% premium, does that make it cheap? We should be comparing the offer to the underlying value of the company, not to the share price”.

It's little wonder why Allan Gray don’t want boards to get carried away by pessimism or fall prey to short-term thinking. After all, they are the very same fallacies Allan Gray try to exploit by buying out of favour shares. If the company’s board fall prey to these biases, it can cap the pay-off from what Allan Gray see as a real behavioural edge.

When it comes to building better boards for shareholders, Mawhinney stresses the need for quality over quantity. “Boards have become a box ticking exercise more than anything else. We're getting to boards with ten, twelve people. I'd rather a board that's half the size, pay each member double and attract really good talent. People with fire in their belly and some energy.”

As well as boards, Mawhinney is cautious of another powerful group that usually fly much further under the radar – proxy advisors. These firms consult large passive shareholders like mutual and index funds on how to vote on matters like AGM resolutions and takeover proposals. This gives them a huge amount of power over corporate governance, even if they own zero shares.

“There are times when the proxy firms highlight things that other shareholders might miss, in which case there is definitely some good that comes from it. But recently, like is the case now with Woodside, I think the proxy firm’s influence is far in excess of what it should be.”

Mawhinney was referring here to Glass Lewis, which recently advised clients to reject Woodside Energy’s climate report and block the re-election of its chairman Rochard Goyder. Woodside was a major position for Allan Gray’s equity fund as of March 31st and they disagree with Glass Lewis’s recommendation.

Mawhinney’s caution on proxy advisors is partly down to the scale of Glass Lewis and its peer Institutional Shareholder Services, which hold an estimated 95%+ market share between them.

“They write these things on thousands of companies, thousands. There is no way that it can all be thoughtful and in-depth. A lot of it is quite superficial and I think the Glass Lewis report [on Woodside] was particularly poor.”

He also thinks their need to retain subscribers pushes proxy advisors to publish occasionally “off the wall” research to keep things interesting. It isn’t the first time Allan Gray have disagreed on the right direction for one of their portfolio companies, and it probably won’t be the last.

 

Joseph Taylor is an Associate Investment Specialist for Morningstar and Firstlinks.

 

  •   8 May 2024
  • 1
  •      
  •   
banner

Most viewed in recent weeks

It’s time for LICs to die

A high-profile dividend cut and a prominent fund manager’s apology have reignited a long-running debate. If investors can access similar exposures more cheaply and efficiently elsewhere, what exactly is keeping LICs alive?

Testamentary trusts survived the trust tax. The drafting battle has just begun.

The fight over testamentary trusts looked settled. Then the draft legislation arrived. Hidden in a technical detail is a question that could force many families to rethink wills they thought were already future-proof.

The new capital gains tax trap for your portfolio

Investors have long accepted one portfolio rule without much question. A major tax shift could change that calculation entirely, forcing difficult trade-offs between risk, discipline and an overlooked cost lurking beneath.

The retirement scorecard: how many of these questions can you answer?

From the maths of retirement, estimating spending and picking the right asset allocation to survive a poor decade, here are the questions every retiree – current or future – should be able to answer for themselves.

How the typical Australian Family could save $844,350 in taxes

The value of a testamentary trust is not determined by wealth alone. Depending on circumstances, it can reduce the tax burden on inherited income, create efficiencies and help build intergenerational wealth.

The housing slide could become a crash

House prices are sliding across Australia, yet the most dangerous ingredient for a housing crash is still missing. If job losses surge amid growing economic risks, today's correction could become a historic property downturn.

Latest Updates

Testamentary trusts: Treasury has picked the wrong reading

A decades-old estate planning tool has survived one tax crackdown only to be caught by another. The surprise isn't who the reform is targeting, but who could end up paying the price for drafting choices made years ago.

Latest from Morningstar

Does an American retirement rule work for Australians?

The 4% rule has survived decades of scrutiny, but Australia's retirement system changes the equation in ways most overlook. Before accepting or rejecting this rule of thumb, it pays to understand what really drives retirement outcomes.

Shares

Glencore lands on the ASX. Should BHP and Rio shareholders switch?

A coal-heavy miner with governance concerns isn't the obvious choice for investors. Yet, Glencore's ASX listing may offer something BHP and Rio can't. The challenge is working out whether the opportunity outweighs the risks.

Why does the system treat capital gains and losses differently?

Investors are often told not to let tax policy drive their investment decisions. Yet, under the new CGT rules, portfolio construction, volatility and even how assets are owned may have an outsized impact on their final outcome.

Economy

Three common sense reforms that Australia needs

What do frozen bank accounts, mortgage traps and pension penalties have in common? They're all symptoms of a system that makes life much harder. Yet the obvious solutions seem to have escaped the attention of Canberra.

Shares

The hidden cost of government debt for investors

Some of the important effects of rising public debt never make the headlines. Research shows the immediate effects may already be unfolding, influencing corporate behaviour in ways that many investors would never suspect.

Investment strategies

When do fundamentals matter?

Is fundamental investing losing its grip on markets? Investors continue to search for valuation-based explanations for every price move, but the dominant force behind short-term returns may be something else altogether.

Sponsors

Alliances

  • ASA-Logo-RGB-ActiveGreen-web.png

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.