Business Week: A Kinder, Gentler Shareholder Activist

OCTOBER 22, 2007

Corporate gadfly Eric Knight wants HSBC to focus on Asia–and he’s enlisting other big investors to help

Eric Knight is gearing up for a fight. In the garden of Zurich’s staid Baur au Lac Hotel, the 48-year-old activist investor digs into his 79-page report on HSBC, which dissects everything from executive compensation to retail branches. Now he’s using that briefing book–part of the usual intense research on his targets–to enlist other big investors in his battle. Knight wants the world’s second-largest bank to drop its global, “unfocused” strategy and concentrate instead on fast-growing regions like Asia, where it has a “clear competitive advantage.” Says Knight: “Telling the emperor he doesn’t have any clothes on is discomforting, but someone has to do it.”

Knight, who runs the $1.5 billion Knight Vinke Asset Management, is a pioneer in Europe, where a culture of shareholder activism is just starting to take hold. Since opening his fund in 2003 with $280 million in seed capital from the California Public Employees’ Retirement System, the U.S. pension fund, he has developed his own brand of activism. Rather than buying big stakes and aggressively insisting on board seats to force change, the Eton-educated investor has a more refined approach. He usually takes small positions in complex companies. And although he wages public and intense battles, Knight, a veteran of Merrill Lynch and Sterling Investment Group, is always clear, cool, and reasoned with management. He’s credited with persuading oil giant Royal Dutch Shell (RDS ) to unify its British and Dutch operations in 2004. Shell Chief Executive Jeroen van der Veer thanked him for being so polite.

A TEAM APPROACH

Early on in his campaigns, Knight reaches out to investors and other parties who can help nudge companies. Two years ago he recruited the mayors of Belgium in his fight against electric utility Electrabel and its majority owner, France’s Suez. The municipalities, which had joint distribution ventures with Electrabel, helped turn up the heat on the two companies. When Suez bought the rest of Electrabel in 2005, Knight banked a 50% profit on his initial investment.

Knight thinks HSBC has at least as much upside. His team studied the bank for more than a year, quietly amassing research in a project code-named Heritage. Knight is now circling the globe to gain support. The bank, he argues, has spread itself too thin, staking out weak positions in Western Europe and the U.S.–where it has also gotten slammed by subprime woes. He thinks HSBC should consider selling or spinning off those retail operations. “They’re like the British empire–planting flags in every country,” says Knight, who plans to move aggressively on another European company soon.

So far his arguments haven’t held much sway with HSBC management despite discussions since May. “We need to refocus on our emerging-market strengths, though we are not going to get out of [developed markets],” Chairman Stephen K. Green told BusinessWeek. In a recent note, Credit Suisse Group (CS ) analyst Bill Stacey wrote: “Knight doesn’t recognize [HSBC’s] valuable leadership positions and wrongly asserts there have been missed opportunities in Asia.”

Still, plenty of investors are giving Knight a vote of confidence–and their money. California State Teachers’ Retirement System sent a letter on Sept. 26 to HSBC in support of Knight. Meanwhile, CalPERS has some $300 million in his fund as well as $300 million in HSBC and other Knight holdings. It forks over 20% of the profits from those direct investments but avoids the usual 1% management fee.

It’s not a bad strategy to follow: With big wins in oil giant Royal Dutch Shell and Suez (SZEZY ), Knight’s fund is up 36% a year since 2004. Says Christianna Wood, CalPERS’ head of global equities: “I’ve never seen him make a mistake.”

Comment submitted by John Donovan: 13 October 2007

I note that Shell CEO Jeroen van der Veer thanked Eric Knight for being polite despite the pressure that Knight successfully applied to Shell. Jeroen also thanked President Putin for seizing ownership of the Sakhalin-2 project in Siberia. Jeroen is a man who would thank a mugger who had just stolen his wallet at gunpoint. Is he of the right material to be CEO of Royal Dutch Shell Plc?

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