Posts Tagged ‘Governance’

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More scary Washington stuff

June 10, 2009

Harvey Pitt, who was chairman of the Securities and Exchange Commission early in the Bush Administration, said Tuesday on a panel at the National Investor Relations Institute 2009 Annual Conference in South Florida:

Sarbanes Oxley was just the tip of the iceberg. We are federalizing the law of corporations. Companies that don’t get that are going to be left behind.

Pitt, now CEO of Kalorama Partners (a Washington-based consulting firm on business and government issues), said Congress and the SEC under the Obama Administration are dramatically changing the regulatory landscape for companies.

For example, shareholder proxy rights and board of director relationships to companies have traditionally been governed by state corporation laws but Congress now is likely to pass new laws on both, Pitt said. The “emotional and moral outrage” on extravagant compensation by companies getting federal aid also will lead to legislation – and it won’t be limited to bailout beneficiaries – he said.

Unfortunately, Congress when it legislates tends to wait for a thalidomide case – and we clearly qualify for that now [with the financial crisis] – and then tends to over-legislate.

Pitt’s advice: Public companies and boards should proactively address executive pay policy to bar large packages when companies are failing, “shareholder democracy” issues such as access to make proxy proposals, and other governance matters.

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Posted in Regulatory reform & SEC issues | Leave a Comment »

DC to IR: “Here we come”

June 8, 2009

NIRI09 advocacy panelPublic companies will face tougher laws and increasing regulatory scrutiny from Washington in the coming year, warns Jeff Morgan, president and CEO of the National Investor Relations Institute (NIRI).

In a panel on advocacy at the NIRI 2009 Annual Conference today, Morgan said the Securities and Exchange Commission (SEC) is pursuing three priorities for 2009:

  1. Enforcement of existing rules such as Regulation FD
  2. Investor protection & corporate governance
  3. Transparency of financial markets & products

“The landscape is changing and will continue to change … It’s a whole new world,” Morgan said. With the change agenda of the Obama Administration influencing all areas of regulation, companies should evaluate their IR practices with care – and join in advocating for balanced, sensible policies - he said.

From the SEC, Morgan said, we can expect to see enforcement cases in the next year centered on Regulation FD issues of selective vs. broad disclosure.

“We’ve been in an environment where we’ve never seen a lot of Reg FD cases come against companies,” Morgan said. The rapid growth of social media poses a challenge to traditional controls on corporate disclosures, he noted. “If we start to see [Reg FD enforcement actions], I think it’s going to cause all of us in a corporate environment to be asking how do we manage that better.”

Change is coming in the proxy area, too. Both the SEC “proxy access” proposal and elimination of broker voting for passive shares are likely to give more power to activist shareholders and pose challenges for companies, he said.

Morgan said the SEC also is looking at requiring enhanced disclosures on board of directors’ leadership approach, board nominations, compensation philosophy and practices, and perhaps nonfinancial factors such as climate-change impacts.

Transparency has been a theme for President Obama from the start. As the idea takes shape in legislation and new regulations, it may benefit IR people looking for more insight into hedge funds and less-regulated areas of the investment markets, but it will mean more demands on public companies, too, Morgan said.

“Corporate transparency is big on Congress’s agenda,” the NIRI president said.

So DC is saying to IR, “Here we come!” And I would add, “Watch out!”

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Posted in Regulatory reform & SEC issues | 2 Comments »

Get ready for new regulation

April 6, 2009

Wondering what new wave of regulation is coming our way? Chairman Mary Schapiro of the Securities and Exchange Commission today offered an outline in a speech to the Council of Institutional Investors.

Schapiro’s agenda for the SEC in 2009 includes proposals for new disclosure requirements, proxy and compensation changes, and other ideas that investor relations teams will want to watch closely.

The initiatives will focus on strengthening the hand of shareholders in electing boards of directors and holding them accountable:

  • In May, the SEC will consider a proxy access regulation to ensure that shareholders “have a meaningful opportunity to nominate directors.” Details to come, but one option was considered before. As MarketWatch reports: “A similar approach was introduced by ex-SEC Chairman William Donaldson in 2003, however it was never approved. Labor-backed investors and activist hedge funds have pushed for the authority; however corporations have opposed it arguing that investors with special interests such as labor unions would push their agenda at the expense of the company’s effort to improve share-value.”
  • The SEC will consider requiring more disclosure on board nominees – data on a candidate’s experience, qualifications and skills, beyond the current brief description of recent experience.
  • The Commission may require boards to disclose reasons for using a particular leadership structure — such as an independent chair, non-independent chair, or combined CEO and chairmanship.
  • Schapiro will seek more compensation disclosure, such as how executive pay drives management’s behavior, including risk-taking. She also wants companies to explain their overall comp approach, beyond highest-paid officers, and reveal consultants’ conflicts of interest.
  • In risk management, the chairman has asked the staff to develop a proposal “that looks to providing investors, and the market, with better insight into how each company and each board addresses these vital tasks.”

In addition, the SEC tomorrow will consider alternatives for limiting short selling – a thorn in the financial side for some companies and IR teams.

The devil is always in the details, and regulatory expansions can be especially devilish when they spring from political outcry. The media are describing the public’s current attitude, especially in Washington, as a “rage” brought on by bear-market investor losses and corporate scandals.

No doubt, securities lawyers will continue to have plenty of work ahead. IR practitioners should keep an eye on the SEC to prepare for what’s coming.

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Posted in Governance, proxy & pay, Regulatory reform & SEC issues | Leave a Comment »

Go out & play defense!

February 26, 2009

The rummage sale level of stock prices has produced an uptick in hostile takeover activity – and in the fear of unwanted suitors – according to the March 2009 issue of Mergers & Acquisitions magazine. As might be expected, there’s a step-up in defensive play among CEOs, boards and investor relations people:

Until last year, the activist investor community had seemingly convinced companies that shareholders rights plans and the cherished poison pill were against the best interest of shareholders. However, as hostile activity seems to be ramping up, management teams are returning to more aggressive defense strategies.

(Poison pill defenses, for example, surged in late 2008 after several years in decline. According to FactSet Sharkrepellent, December saw 28 poison pill adoptions, the most in any month since 2001. Full-year 2008 adoptions of 127 poison pills were the most since 2002, FactSet says.)

M&A writer Avram Davis notes that lawyers often are the key players on defense. They encourage measures like language in bylaws to require advance notice of proposals for shareholder meetings, safeguards against activists’ calling their own meetings, and systems for tracking flow of confidential information to prevent its use against the company.

Another defensive strategy goes to the heart of investor relations:

Perhaps the easiest protection against hostile takeover attempts is among the least practiced – shareholder communications.

Joseph L. Johnson III, chair of the M&A and corporate governance practice at Goodwin & Procter LLP, tells M&A many companies have gotten out of the habit of meeting regularly with shareholders. Johnson (no relation) says this is dangerous, because you can be sure a hostile bidder will be actively reaching out to your investor base.

‘I’ve been telling people for years, it’s like you’re running for Congress,’ says Johnson. ‘You need to get out there and press the flesh.’

Staying in close touch with investors is essential. And going out to address concerns and explain the business strategy is the best way to communicate that management is serious about creating value.

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Posted in M&A communications | Leave a Comment »

Aggressive activists usually succeed

February 7, 2009

No one on the corporate side wants to get that confrontational call or letter from a hedge fund or investor demanding a change in management. But a paper by two New York University profs in the February 2009 Journal of Finance concludes shareholder activism works – for shareholders, that is.

The study draws upon 151 hedge fund activist campaigns from 2003 to 2005, plus a second data set of 154 activist efforts spearheaded by individuals, private equity funds, VCs or other asset management groups. All of the campaigns studied involve aggressive calls for change such as gaining seats on the board, replacing the CEO, stopping a merger or pursuing strategic alternatives. Symbolic or minor changes aren’t included.

The authors look at stock price movement around the activists’ declaration of intent in a 13D filing and in the year following, as well as the types of change demanded and achieved.

The results?

  • Stocks of companies targeted by hedge fund activists earn a 10.2% abnormal return in the period around the filing of the 13D. Those facing other kinds of activists outperform by 5.1%.
  • Superior returns persist in the one-year period following the 13D. Hedge fund campaigns deliver an average 11.4% abnormal return after a year, and other activists’ interventions result in 17.8% outperformance.
  • When it comes to getting management to make the proposed changes, aggressive activists are more often successful than not. Hedge funds pushing a confrontational agenda win 60% of the time, and other investors achieve their objectives in 65% of the campaigns. Most commonly, they win board seats by threats of proxy contests.
  • Hedge funds often target more financially healthy companies and often demand cash payouts or share repurchases. Other activists are more likely to focus on changing strategies or spending priorities.

The study doesn’t focus on defensive strategies for companies - just outcomes. Prevention may be the best defense. In a time of depressed equity prices, management and boards should be taking actions (without anyone demanding change) to bolster shareholder value … reducing costs, strengthening the balance sheet, making needed changes in leadership.

Investor relations professionals, I suspect, can help mostly by serving as a timely and outspoken voice to convey shareholder concerns up the line – before anyone declares war through a 13D. Now, more than ever, IR should be listening and providing a conduit to management and the board.

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Posted in Activist shareholders | Leave a Comment »

Keep an eye on the water

August 9, 2008

Companies continue to swim in what could be turbulent waters, especially management teams struggling with weak performance or caught in an economic riptide. And then there are what some folks call the sharks.

Shareholder activists are just as active in 2008 as last year, according to FactSet Research Systems Inc., a data-crunching firm. Activists unleashed 262 campaigns, including 53 formal proxy fights, in the first half of 2008. It’s virtually unchanged from 259, with 55 proxy fights, in the first half of 2007.

According to Financial Week (July 28-August 4), “A handful of hedge funds continue to pick the most fights.” Eight hedge funds are responsible for 30 percent of the battles, with Carl Icahn and Philip Goldstein’s funds at the top of that list, FW says.

FactSet runs a surveillance and intelligence service called SharkWatch, as well as a takeover defense monitoring and advice service called SharkRepellent. (We might guess from the names that there is a lack of affection for hedge funds and other activists – although FactSet gathers and sells data to varied players in the capital markets.)

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Hedge fund activists – doing what works

July 29, 2008

The best defense against “activist” shareholders going into battle against management is prevention: taking actions on management’s own initiative to realize shareholder value (e.g., cutting costs, making better use of the balance sheet, or confronting difficult decisions in leadership). Activists will keep hectoring companies they think are in need of change because, well, it’s a good investment strategy: 

Activism is become increasingly popular as an investment strategy among hedge funds for one main reason – it works. According to our research at 13D Monitor, the average return for more than 200 material activist campaigns that were completed during the past two years was 18.55 percent, nearly double the average return of 9.49 percent for the Standard & Poor’s 500 stock index for the same time periods.

- Kenneth Squire, founder of 13D Monitor,
“Not Your Father’s Activist,” Alpha, May 2008 

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Yahoo! is growing up

July 22, 2008

The rough patch Yahoo! is experiencing brings back a couple of IR lessons I’ve encountered. In the spring of 1996, my colleagues and I were cooling our heels in the lobby of a big mutual fund, waiting to see a portfolio manager. Our European-based company laid claim to being the world’s largest chemical firm. Steeped in more than a century of history, measuring revenues in billions of Deutsche Marks and significance in tens of thousands of employees. My colleagues spent their work lives amid a huge complex of chemical and pharmaceutical plants with multistory reactors, environmental scrubbers, pipes everywhere. We were old economy.

Into the waiting room of that fund walked another crew of executives – much younger – and we introduced ourselves. Their company was called “Yahoo!” and the business had something to do with the Internet. This was 1996, so the picture was a bit fuzzy to guys who worried about plant utilization and return on capital employed. Eyeballs? Page clicks?

OK, we chuckled a little … “Yahoo!” seemed like an idea lacking material substance. Of course, this was before the Internet swallowed virtually the entire world’s flow of information and we all became addicted to search engines to sort through it. These were the earliest days of the dot-com bubble, before Alan Greenspan posited “irrational exuberance” could take investors on a wild ride. Yahoo! They were new economy.

The memory has surged back in the recent to-and-fro over whether Yahoo! should be sold to Microsoft, split up or something else. Yesterday, the company gave in partially to activist investor Carl Icahn and agreed to name him and two choices to the Yahoo! board.

For the record, Yahoo’s IPO on April 12, 1996, did fine. Investors loved the brand and the search engine’s potential. Yahoo!’s market cap briefly topped $1 billion that day. It has been a wild ride, as Greenspan predicted, but YHOO now tips the market scales at close to $30 billion.

Yahoo! is just over 12 years old as a public company, 14 total if you go back to two Stanford PhD candidates founding ”Jerry and David’s Guide to the World Wide Web.” Nobody questions today that Yahoo! is a business, although shareholders now fret about slumping profits, slower revenue growth, competitors and the like – hence, the push for a quick-fix sale.

There is a certain coming of age in fighting off a takeover and then inviting onto your board someone whose presence the media labels an “uneasy truce.” Best wishes to staff and shareholders of this child of the Nineties growing up – and no doubt facing more changes – in the new millennium.

By the way, the company I worked for in ’96 went away more quickly than Yahoo! – selling or spinning off those chemical plants, going after higher returns in pharmaceuticals. It has merged and changed its name twice, and revamped its management team. Maturing revenue curves have made the Big Pharma world consolidation-prone.

Old economy and new are not as different as either of us thought.

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Posted in Capital markets & IR | Leave a Comment »

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