Equinox Partners takes a stand against mining’s nonaligned directors

When Equinox Partners Investment Management adopted a strict voting policy against industry directors who have served for two or more years but have invested less than two years of director’s fees into the underlying equity, it took a stand for shareholder value rarely seen in the junior space.

The New York-based hedge fund, with over $700 million in total assets under management with more than half in gold and silver junior miners, announced its new investment stewardship policy toward directors of public companies last month.

It sets “a clear, lower-bound for director share ownership,” according to chief investment officer Sean Fieler.

He said Equinox Partners intends to push back on the growing indifference of boards to non-executive director stock ownership and the decision of some companies to prohibit non-executive directors from owning stock altogether.

“We have seen a troubling deemphasis of financial alignment among international mining companies,” Fieler said in an interview.

The executive underlined that the company was not acting as an activist investor, but looking out for its interests as a long-term value investor.

Equinox has put in a rigid policy of not voting for nonaligned directors, even if they’re running in an uncontested election.

“If those directors don’t own at least a very lower bound of stock, which we determined to be two years of their board compensation if they served for two years or more, and we feel like that’s an incredibly generous, probably too low, lower bound, they have really a different view of the role of a director than we do,” he said.

“The policy gets that 10% of the very worst actors.”

By elevating individuals who do not own stock and are unlikely to acquire a significant financial interest in the company they oversee, the board is adding colleagues who will tend to prioritize “collegiality” and “reputation” over its company’s financial interests, particularly in the junior gold space, the executive argues.

‘Clubby’ boardrooms

Fieler said he had witnessed declining levels of insider ownership at the GDX across a swath of companies in the last seven years.

“You see a meaningful drop in insider ownership, and we really see a growing number of boards treating a director position as really a slot to fill rather than a technically competent person that’s going to be aligned with shareholders, and we think that’s problematic,” he said.

Fieler points to Gold Fields’ (NYSE: GFI; JSE: GFI) proposed acquisition of Yamana Gold (TSX: YRI; NYSE: AUY) as a “particularly interesting wrinkle on this whole problem.”

The context of the Yamana deal is an excellent example of how when one works through the list of reasons to pursue a merger, the valuation is not amongst them, he argued.

And if one has a majority on the board that has no alignment with shareholders, it spells trouble for investors.

Since the Johannesburg-based miner approached its target, shareholders have criticized the proposed all-stock merger, arguing the friendly approach does not guarantee growth and profitability.

Fieler noted Gold Fields’ case as being peculiar in its policy as it states non-executive directors shouldn’t have alignment with shareholders so they can better represent all stakeholders.

“It’s very much not a random thing that is happening in that case – it’s kind of a natural outcome of a potential policy to disentangle the company’s owners from the board. It’s more so than has usually been done in the ‘clubby’ nature of boardrooms,” said Fieler.

While pointing out there is no law against having a ‘clubby’ a boardroom, Fieler said boards and board chairs don’t want dissidents in the boardrooms as it makes it harder to govern those companies.

“But as a general rule, in the junior mining space, we don’t see an effort on the part of insiders to invite shareholders onto the board or substantial shareholders under the board,” he said.

“That’s not the norm. And because of that, you can really get divergent interests between the shareholders, even substantial shareholders and insiders at these companies. And then that leads to various unattractive behaviours from a shareholder perspective.”