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.
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 opposed pay policies at six large companies: Aviva, Cairn Energy, Centamin, Central Rand Gold, Pendragon and WPP. Though those defeats represented a tiny percentage of the overall number of remuneration reports voted on for FTSE 500 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. Just this past 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 off the activist investor wish list: changes to compensation, disclosure of political expenditures, and support for proxy access, among other concessions.
Increasing engagement
On Wall Street, large companies like Goldman Sachs and JP Morgan 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 that the company shut down all of its nuclear power plants. At Toyota, beset by calamitous safety problems, the company 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.
‘There’s increased shareholder activism everywhere,’ says John Wilcox, chairman of Sodali, a global consultancy and proxy solicitation firm. ‘That is a 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, ‘they should be preventing activism by dealing with the issues before the shareholders 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 investor relations (IR) programs,’ Wilcox continues. ‘It means being fully aware of ways in which governance policies and performance issues are being perceived by shareholders. It’s not rocket science.’
Still, conflict with shareholders is sometimes unavoidable, and companies 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 progressive proxy solicitation and shareholder communications consultancy.
‘It’s really important that 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, and 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 to 14 Bumi board members, complaining of governance issues in the London Stock Exchange-listed company, among other things. And though Cuisia could not comment on her company’s specific approach to this battle, she noted that the approach to winning such disputes is often similar across proxy fights.
Winning over institutional investors
Institutional investors are among the most reliable sources of votes. Many have corporate governance and proxy voting policies in place, which can provide valuable information on how to approach them. Private client brokers who hold securities on behalf of clients will generally only vote if those clients instruct them to. But many nations, including the UK, have laws in place that require custodians to disclose the names of their clients, so it’s important for issuers to make sure they have mechanisms in place to track down the underlying individual voters, thereby make voting easier. And while many hedge funds don’t own the actual stock, investing instead in derivatives, in a very tight proxy battle it’s possible to get hedge funds to convert their contracts to physical positions that can allow a prime broker to vote on their behalf.
‘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 that they are aware of what policies are important before arranging meetings with investors or speaking directly to them.’
That approach is also important when management fears a shareholder revolt. For example, JP Morgan is reportedly offering 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 of the board. The proposal is being offered in response to the multi-billion-dollar trading loss by London-based traders.
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 even before the merger was officially announced, says Cuisia, with the issuers reaching out to shareholders and keeping them in the loop. Boudicca Proxy targeted the top 500 institutional investors, and Cuisia dispatched a team of 20 people to contact and engage. The company itself reached out to at least the top 100 via telephone or email, with the CEO, chairman or senior independent director meeting with investors face to face to discuss and explain its strategy.
IR departments getting involved
Georgeson 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, since the process has traditionally been the responsibility of the corporate secretary, general counsel or someone in legal. These IR officers – and the executive teams they are working with – need to be aware of the division of labor within each institutional investor. Many companies wind up engaging with fund managers or sector analysts during earnings calls and roadshows, but those individuals often aren’t involved in the actual voting decisions.
‘I can’t tell you how many times we have been approached by clients who said the C-suite met with all their top shareholders and they are all supportive, but when the votes come in, not all are in favor,’ Sydorowitz says. ‘Positive feedback at a roadshow doesn’t equate to a positive vote on all resolutions.’
Last year’s shareholder spring, along with pending changes in laws that will give shareholders even more power to approve forward 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.
In the US in recent years, 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, decided 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 unions. The first step is to make sure that outside counsel is familiar with the ways and means of presenting shareholder proposals so that the company can petition the SEC to exclude them from the ballot.
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 cannot be reached, the company 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 are anticipating a raft of shareholder proposals mandating new corporate political spending disclosures – a popular initiative in the 2012 proxy season that took many companies by surprise. To head off negative votes, a number of companies are 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 which would have allowed investors who owned 3 percent of a company stock for three years to place their own director candidates on the ballot. The court also ruled, however, 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.
‘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 do 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 that 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.’
