What steps are companies taking to thwart the latest surge in investor activism?
The growing activism of shareholders across the globe, along with a number of high-profile revolts, is prompting many companies to reconsider the way they approach investor relations, more aggressively seek engagement and increasingly bring in outside consultants to advise them, a number of experts say.
In the UK, it was hard to miss last year’s ‘shareholder spring’, the watershed insurrection where shareholders voted
 ‘Companies should prevent activism by dealing with the issues before they become proposals’ – John Wilcox, Sodali |
down pay policies at six large companies: Aviva, Cairn Energy, Centamin, Central Rand Gold, Pendragon and WPP. Though those defeats represent just a tiny percentage of the overall number of remuneration reports voted on at FTSE 350 companies (the vast majority passed handily), they generated widespread media coverage and bold proclamations that a new age of investor activism had crossed the Atlantic.
Across the pond in the US and Canada, meanwhile, activist shareholders have continued to flex their muscles. In April, shareholder activists claimed perhaps their biggest scalp yet, helping bring down former Chesapeake Energy CEO and chairman Aubrey McClendon, a man whose outsized influence on his company, defiance in the face of shareholder demands and large pay packages long ago made him public enemy number one for many activist investors. The company last year also replaced four of nine board members, and announced a number of changes that came straight from the activist investor wish list: changes to compensation, disclosure of political expenditure and support for proxy access, among other concessions.
On Wall Street, large companies like Goldman Sachs and JPMorgan are engaging with shareholders like never before – even, in some cases, sending directors to meet face to face with large institutional investors to lay out their case for policies expected to come up for votes at the AGM.
The shareholder rights movement has even reared its head in Asia, though most agree the ownership structure of many public companies there makes any systemic shareholder revolution far less likely. Even so, in Japan, shareholders introduced several resolutions at Tokyo Electric Power last year, after the Fukushima disaster caused the company’s stock to lose nine tenths of its value. One demanded the company shut down all its nuclear power plants.
At Toyota, beset by calamitous safety problems, the firm finally announced it would appoint outside directors for the first time, including former General Motors executive Mark Hogan, only the second non-Japanese person ever appointed to the board.
Increasing engagement
‘There’s increased shareholder activism everywhere,’ says John Wilcox, chairman of Sodali, a global consultancy and proxy solicitation firm. ‘That’s the result of a lot of long-term trends that have to do with increasing the concentration of ownership in institutional investors, and the decline of the individual investor. Pension funds now have the power of collective action.’
Perhaps the most important measure for companies looking to counter the threat of shareholder activism, most experts agree, is simply to take proactive steps to make sure the activism is detected before it matures.
Ideally, says Wilcox, companies ‘should be preventing activism by dealing with the issues before the investors bring them in the form of shareholder proposals or some other form of activism. That means being very much aware and having an engagement program at the board level as well as through management and IR programs. It means being fully aware of ways in which governance policies and performance issues are being perceived by shareholders. It’s not rocket science.’
Preparing for conflict
Still, conflict with shareholders is sometimes unavoidable, and firms should be ready for that as well. Companies should make sure they carry out a ‘shark watch’, advises Sheryl Cuisia, managing director and founder of Boudicca Proxy Consultants, a UK-based proxy solicitation and shareholder communications consultancy.
‘It’s really important issuers maintain up-to-date, thorough analysis of their share register so they understand at all times who the beneficial holders and fund managers are,’ she adds. ‘We always tell our clients to look at shareholder activity and watch out for any strange patterns in terms of shareholder movement or movement in the stock price.’
Once a proxy fight of any sort is in play, understanding shareholder composition is even more essential, says Cuisia. In recent months, her firm has been working with coal mining company Bumi, which has been engaged in a high-profile battle with financier Nat Rothschild. Earlier this year, Rothschild sought to oust 12-14 Bumi board members, complaining of governance issues at the London Stock Exchange-listed company, among other things. And although Cuisia could not comment on her company’s specific approach to this battle, she notes that the approach to winning such disputes is often similar across proxy fights.
‘What we always suggest in a proxy fight situation is to engage with shareholders often and early,’ Cuisia says. ‘On all our campaigns, we advocate ongoing shareholder engagement. Good proxy solicitors should help their clients get in front of good governance; they should ensure they are aware of what policies are important before arranging meetings with investors or speaking directly to them.’
Revolting shareholders
That approach is also important when management fears a shareholder revolt. For example, JPMorgan reportedly offered its biggest investors meetings with directors in an effort to lobby them against a non-binding shareholder proposal that would force CEO Jamie Dimon to relinquish his dual role as chairman. The proposal was offered in response to the multi-billion-dollar trading losses suffered by London-based traders last year.
Elsewhere, in the proposed merger between Xstrata and Glencore, remuneration policies were seen by some investors as a possible stumbling block to the deal. Shareholder engagement began early, says Cuisia, with representatives from each company and their advisers contacting investors to keep them in the loop.
‘In the case of Bumi, or the recent Xstrata-Glencore merger, where you are dealing with various hostile situations, engagement is very important, and directors were very active in engaging with shareholders – not just the top ones, but also a wider audience,’ Cuisia says. ‘They spent a lot of time actively reaching out, mostly [through] face-to-face meetings, telephone calls and emails. Meetings would be set up by the director directly, through secretaries or through us.’
Georgeson’s London-based CEO Cas Sydorowitz says that, in general, many companies have started asking their IR teams to get more involved in the AGM process – a sea change, as the process has traditionally been the responsibility of the corporate secretary, general counsel or someone in legal. IROs, and the executive teams they work with, need to understand the division of labor within different investment institutions. The portfolio managers and sector analysts IR departments typically engage with often have no involvement at all in the voting decisions.
‘I can’t tell you how often we have been approached by clients who said the C-suite met with all the top shareholders and they were all supportive, but when the votes came in, not all were in favor,’ Sydorowitz comments. ‘Positive feedback at a roadshow doesn’t always equate to a positive vote on all resolutions.’
Last year’s shareholder spring, along with pending changes to laws that will give shareholders even more power to approve executive pay, ‘is causing issuers to take engagement with shareholders far more seriously,’ Sydorowitz says. Changes are also being written or are under consideration in Switzerland, Spain, Germany and Italy, among other places.
Wider issues
In the US recently, shareholder proposals have moved governance issues into the mainstream, notes John O’Grady, senior vice president of Laurel Hill Advisory Group. ‘Shareholder activism is not simply about the board of directors any longer,’ he says. ‘It’s also about political spending, clean water, coal dust.
‘In the past, I think many companies, when they received a shareholder proposal, made a decision to ignore the proponents. That worked for many companies 10, 15 or 20 years ago, but it’s just about the worst thing a company can do now.’
The primary imperative, O’Grady says, is to ‘carefully engage’ with the investors – whether it’s an activist investor like Carl Icahn or Bill Ackman looking to change directors or the direction of the company, or governance activists such as labor unions. The first step is to make sure outside counsel is familiar with the ways and means of presenting shareholder proposals so the company can petition the SEC to exclude them from the ballot, if possible.
If that fails, the company needs to engage with the activists to explore a settlement or some middle ground. Sometimes the worst-case scenario is a public vote, which can be extremely contentious and cause reputational damage and negative PR.
Rallying the troops
If, however, an agreement can’t be reached, the firm needs to determine whether to fight the proposal, and then sit down with advisers and come up with a solid message consistent with its policies to take to its institutional and retail shareholders in the hopes of rallying them to the company cause.
In the lead-up to this year’s proxy season, many US-based companies were anticipating a raft of shareholder proposals mandating new corporate political spending disclosures – a popular initiative in the 2012 proxy season that took some issuers by surprise. To head off negative votes, a number of companies have been engaging with shareholders and agreeing to provide some level of disclosure, O’Grady says.
Many are also anticipating an increase in the number of so-called proxy access proposals. The 2012 proxy season was the first following a US District Court decision that struck down an SEC rule that would have allowed investors who owned 3 percent of a company stock for three years to place their own director candidates on the ballot. But the court also ruled that investors could place their own proxy access proposals on the ballot, leading to a raft of experimental language to see which would pass SEC muster and which would appeal to shareholders.
This year, a consensus of sorts has emerged around the same language originally proposed by the SEC; proposals using that language passed at both Chesapeake Energy and Nabors Industries last year. Investor relations officials from both companies declined to comment or did not return phone calls about how they were handling investor outreach.
‘You need to get out there and engage with your shareholders, put together the narrative on the fact that your board of directors is responsible to shareholders, that you have independent directors and audit committees,’ O’Grady says. ‘You need to make clear that board members act in the best interests of shareholders and understand they are fiduciaries for shareholders, or you are going to run up against some situations. The best defense is to act responsibly in the interest of shareholders.’
This article also appears in the May 2013 issue of Corporate Secretary.
