Finding and facing proxy voters can be vital as IROs act as pollsters in the run-up to important votes
Proxy season may lack the spectacle of a political election, but it is not without drama. The issues put to shareholder votes are often simple, but some – like contested mergers or game-changing governance reforms – can be eventful.
During times of controversy, IROs find themselves acting a lot like pollsters. With their attention trained on Wall Street, IROs are experts at gauging investor mood. As proxy issues surface in the run-up to annual general meetings (AGMs), IR professionals seek to determine three things: who is on management’s side, who is against it and – most important of all – who is undecided.
In corporate elections, it can be fairly easy to tell, based on voting histories, who will and won’t uphold the management line. But even after those sides are taken, there can still be a sizeable group of shareholders to influence. It is this group that becomes the target of the IRO, who is tasked with achieving a winning management vote.
There is a growing awareness of the benefit of showing a history of fairness in hearing out shareholders. While some companies still stonewall when investors complain, others are addressing controversy head on, perhaps to minimize ballot proposals.
Pfizer invited top investors in to explain its executive pay packages. Dell started an IR blog in response to some very sore points about its performance. And the SEC has been pushing broader adoption of the concept of informal dialogue via electronic shareholder forums as ‘another venue’ to share thoughts and ideas about corporate direction.
Companies that work on building this kind of trust might find it alleviates misperceptions that percolate into problems at proxy time. Statistics recorded in proxy firm Georgeson’s 2007 annual corporate governance review show this trend at work. Out of 130 resolutions submitted for establishing a majority vote standard in director elections at S&P 1500 companies, fewer than 30 made it onto ballots. ‘Companies are now more willing to settle these issues behind the scenes rather than face shareholder wrath,’ notes Georgeson president David Drake.
Sometimes, however, the proxy outcome is down to a direct pitch. So how does an IRO make it happen? Proxy solicitors insist the approach should be just like it is for investor roadshows and sell-side presentations, except that companies are trying to influence voting decisions rather than buying decisions. And with so much at stake, companies are finding they need to get this just right.
Testing voter preferences
The key part of the proxy process is identifying which investors are open to influence, and no one is better placed to do this than the IRO who interacts with shareholders on a daily basis. The more the company has engaged with shareholders, the easier it is. But whether communication has or hasn’t been established, there is a script to follow.
The first step is to analyze the investor base. Many companies create a spreadsheet listing their top institutional shareholders, their holdings and notes on whether they are index, growth or value investors. It’s not necessarily obvious what their leanings are, but the main goal for the IRO is to go after those who are undecided or who vote on a case-by-case basis.
The information-gathering requires digging. Some institutional funds publish their voting policies on their websites; others vote down the line with the major proxy advisory firms. IROs can call the portfolio managers handling the fund, but they may not answer direct inquiries. ‘Most are pretty strict with their non-disclosure policies,’ explains Paul Schulman, executive managing director of the Altman Group.
Ken Sylvester, New York City’s assistant comptroller for pension policy, admits he’s not revealing. ‘We are open to inquiries from external proxy services, but prefer to hold our votes confidential until a company’s annual meeting is held,’ he says.
It can be a challenge just to locate the proxy voter. While the portfolio manager might vote the shares, sometimes proxy voting is handled in a separate area like corporate governance or compliance. ‘Quite frequently, the person doing the proxy voting is difficult to find,’ says Linda Scott, a senior consultant to Governance for Owners, which handles voting, structural engagement and policy matters for institutional investors. ‘If they want to make it hard, they can.’
Window of opportunity
During proxy season, it’s even tougher to make contact because proxy voters may be looking at hundreds of companies. ‘If I were trying to find that person, I’d spend time doing it in the off season,’ Scott says. ‘Once it’s done, you know where the function is, and it’s worth the effort.’
Waiting until the fourth quarter is too late. Meredith Miller, assistant treasurer for policy at the Connecticut Retirement Plans and Trust Funds, says she knows by mid-August which companies she’s going to engage on governance or strategy issues, and starts the engagement in October or November to leave time for filing an official shareholder proposal before a company’s proxy statement goes out.
Stock surveillance firms can provide dossiers on hedge funds’ activism history. Funds’ ‘poison pen’ letters to other companies outlining their philosophies may also be available in regulatory filings. Despite the notoriety around some of their muckraking, however, hedge funds aren’t necessarily a threat. ‘A lot just don’t vote,’ Schulman says. Those that are active aren’t usually shy, though. ‘I suspect, if a hedge fund cares about governance issues, you know it,’ Scott says.
Once there is some shape to the potential vote, the real work begins. ‘You can go to the institution before the proxy is filed and talk on a fully disclosed basis,’ says Schulman. ‘Or you can go on an anonymous basis to see how it might vote, or how you can convince it to approve what it is the company wants to do.’
The goal is to steer the shareholder from disagreement to a favorable voting outcome without being too heavy-handed. ‘Be careful not to inundate voters to the point where they lose sympathy,’ warns Drake.
There is also the proxy advisory firm constituency. Eric Jackson, a Florida-based investor who challenged Yahoo! and Motorola, says he regularly lobbies RiskMetrics (formerly Institutional Shareholder Services), Glass Lewis and Proxy Governance. Their verdicts can be extremely potent with investors, so IROs can’t afford to ignore them.
‘We’re open to any contact from the board of directors or corporate secretary any time they want to reach out, and we’d welcome any amount of true engagement,’ Miller says.
But companies in many cases aren’t taking the opportunity. ‘Rarely do we get calls from companies trying to determine how we will vote on management proposals,’ Miller continues. ‘Generally, companies enlist proxy services for that purpose. However, over the last few years, I have noticed a sharp decline in the number of calls from these services.’
Essentially, unhappy investors are really looking for some sense of being heard, especially by a board member; that can go a long way when shareholders mull over whether to launch a ‘vote no’ campaign against a director. Even if there is nothing the IRO can do to change a voter’s mind, the polling is still important: it fulfills the role of a shareholder perception study, the results of which are often of intense interest to management and the board.
Busy season ahead
If it's anything like last year, proxy season in 2008 won't be quiet. Even if companies have no major issues to push, shareholders seem poised to intervene. Dozens of 'say on pay' proposals have already been filed at US companies for 2008 following 40 such measures at S&P 1500 companies last year. And the UK-based voting advisory firm Manifest says pay will be the top corporate governance issue in the UK.
Despite the SEC's decision to exclude proxy access proposals, a US pension fund continues to push the issue, filing for the right to nominate board directors at JPMorgan and Bear Stearns. UK and European shareholders are also going to use 'no' votes on directors to register complaints about independence and the makeup of pay and audit committees.
There will be fresh issues presented by the subprime mortgage crisis, says Subodh Mishra, an editor with RiskMetrics Group: 'Homebuilders are being targeted with a broad range of proposals that include requests to set up a mortgage lending compiance committee, while labor fund officials say directors at many financial companies will become targets for 'vote no' campaigns'.
With so much chief executive turnover lately, some investors will be challenging companies (including Verizon, Bank of America and Merrill Lynch) to detail and disclose succession-planning policies. And the Change to Win Investment Group will call for the exclusion of uninstructed broker votes in director elections, Mishra says.
