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30 Apr. 2010 | Comments (0)

If the current proxy season continues on the course it has set early on, public company boards and management are facing a contentious shareholder environment that wants to institute corporate governance changes, remove directors, remove anti-takeover mechanisms and wants some say on executive pay. While the level of shareholder activism has ratcheted up due to the fallout from the financial crisis, a more shareholder-friendly SEC is not making things easier for boards and management. The shift in the investment community has led The Conference Board Governance Center to create an Expert Committee on Shareholder Activism and publish a 400-page Shareholder Activism Report and set up an online portal. The report, which is co-authored by Matteo Tonello, director of corporate governance research at The Conference Board, and Damien Park, managing partner of Hedge Fund Solutions Inc., provides the tools required to understand their shareholder base, assess gaps and vulnerabilities that could make the company a target, and ultimately respond to possible requests for change. During the first of a three-part Conference Board Knowledge Series Webcast [“The Changing Face of Shareholder Activism: Best Practices for Companies for Engagement, Assessment and Response”] yesterday some members of The Conference Board’s Expert Committee on Shareholder Activism told viewers the best defense against aggressive shareholder activists is for boards to improve shareholder dialogue before their companies are faced with an activist campaign. To listen to a replay of the Webcast or register for the second and third parts, click here. The second part “What is Your Company’s Exposure to Shareholder Activism?” is scheduled for May 6 at 3 p.m. and features Arthur Crozier, co-chair of Innisfree M&A Inc. The third part “Avoiding and (if necessary) Responding to Shareholder Activism” is scheduled for May 13 at 11 a.m. and features David Katz, corporate partner of Wachtell, Lipton, Rosen & Katz. “If you haven’t communicated with a shareholder before an actual campaign has started, it’s too late,” David Drake, president of proxy solicitor Georgeson Inc., said during the Webcast. “We are seeing our clients approach institutional investors about corporate governance matters. We are encouraging our clients to do this; it may bear fruit when an activist campaign takes place.” Communicating with shareholders now is more important than ever, especially when you consider that in addition to the institutional investors who are becoming more active hedge fund are rebuilding themselves for this proxy season where they seek to return cash to shareholders and boost dividend payments. “We’re anticipating a shift back to balance sheets from operational [activism],” said Park, managing partner of Hedge Fund Solutions, said. Many of those funds have rebounded well enough to post gains in returns, such as 151 percent for Crescendo, 31 percent for Greenlight Capital and 33 percent by Third Point. The increase in returns has also led to the filing of more 13-d filings (required under SEC Rule 13 (d) whenever a party owns 5 percent of a public company) by such funds as Barrington Capital. A spike in such filings usually signals that an investor is looking to target a company for a shareholder activism campaign. While management at such target companies in the past could rely on certain institutional investors and brokers representing retail investors to ward off such campaigns, that is not the case this year. “Companies had been able to defend these in the past,” Drake said. “But this year the large funds (like Fidelity) have started to change their stripes and are not supporting management. They are acting on a case by case basis.” As for the retail investor vote, thanks to the SEC’s rule prohibiting broker discretionary voting starting this proxy season companies are faced with a dilemma. “I think we can expect boards will have to take some action to get out the retail vote, especially those with majority voting,” Andrew Bab, partner of Debevoise & Plimpton LLP, said. “Your typical retail vote by brokers will not be there.” To get out the vote, Bab suggests boards approve the following:
  • Extend the proxy solicitation period
  • Put language in the proxy statement that says it is important for shareholders to vote their shares on specific items.
Daniel Gagnier, managing director at Sard Verbinnen & Co., told Webcast viewers that companies should learn to manage a shareholder activist situation instead of just being defensive. He believes companies shouldn’t be afraid to use their earnings calls and their relationships with the media to point out what certain activists are trying to do, whether it’s an attempt to break up the company, change corporate governance policies, or replace directors.
  • About the Author:Gary Larkin

    Gary Larkin

    Gary Larkin is a research associate in the corporate leadership department at The Conference Board in New York. His research focuses on corporate governance, including succession planning, board compo…

    Full Bio | More from Gary Larkin


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