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.

 

banner

Most viewed in recent weeks

Raising the GST to 15%

Treasurer Jim Chalmers aims to tackle tax reform but faces challenges. Previous reviews struggled due to political sensitivities, highlighting the need for comprehensive and politically feasible change.

7 examples of how the new super tax will be calculated

You've no doubt heard about Division 296. These case studies show what people at various levels above the $3 million threshold might need to pay the ATO, with examples ranging from under $500 to more than $35,000.

The revolt against Baby Boomer wealth

The $3m super tax could be put down to the Government needing money and the wealthy being easy targets. It’s deeper than that though and this looks at the factors behind the policy and why more taxes on the wealthy are coming.

Are franking credits hurting Australia’s economy?

Business investment and per capita GDP have languished over the past decade and the Labor Government is conducting inquiries to find out why. Franking credits should be part of the debate about our stalling economy.

Here's what should replace the $3 million super tax

With Div. 296 looming, is there a smarter way to tax superannuation? This proposes a fairer, income-linked alternative that respects compounding, ensures predictability, and avoids taxing unrealised capital gains. 

The rubbery numbers behind super tax concessions

In selling the super tax, Labor has repeated Treasury claims of there being $50 billion in super tax concessions annually, mostly flowing to high-income earners. This figure is vastly overstated.

Latest Updates

Investment strategies

Trump's US dollar assault is fuelling CBA's rise

Australian-based investors have been perplexed by the steep rise in CBA's share price But it's becoming clear that US funds are buying into our largest bank as a hedge against potential QE and further falls in the US dollar.

Investment strategies

With markets near record highs, here's what you should do with your portfolio

Markets have weathered geopolitical turmoil, hitting near record highs. Investors face tough decisions on valuations, asset concentration, and strategic portfolio rebalancing for risk control and future returns.

Property

Soaring house prices may be locking people into marriages

Soaring house prices are deepening Australia's cost of living crisis - and possibly distorting marriage decisions. New research links unexpected price changes to whether couples separate or silently struggle together.

Investment strategies

Google is facing 'the innovator's dilemma'

Artificial intelligence is forcing Google to rethink search - and its future. As usage shifts and rivals close in, will it adapt in time, or become a cautionary tale of disrupted disruptors?

Investment strategies

Study supports what many suspected about passive investing

The surge in passive investing doesn’t just mirror the market—it shapes it, often amplifying the rise of the largest firms and creating new risks and opportunities. For investors, understanding these effects is essential.

Property

Should we dump stamp duties for land taxes?

Economists have long flagged the idea of swapping property taxes for land taxes for fairness and equity reasons. This looks at why what seems fairer may not deliver the outcomes that we expect.

Investing

Being human means being a bad investor

Many of the behaviours that have made humans such a successful species also make it difficult for us to be good, long-term investors. The key to better decision making is to understand what makes us human and adapt.

Sponsors

Alliances

© 2025 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.