Posts Tagged ‘Activist investors’

Shareholders don’t own companies?

April 1, 2010

The Harvard Business Review offers a provocative thought in its April 2010 issue: According to two professors at overseas universities (which may be relevant), shareholders are not the owners of corporations – and boards of directors shouldn’t feel so compelled to make decisions in the shareholders’ interest.

No, this isn’t an April Fool’s Day joke – at least, I’m pretty sure it’s not.

Citing the recent Kraft Foods takeover of Cadbury, a case of M&A not welcomed on the British side of the Atlantic, the article asks whether the Cadbury board could have said no – or said it more emphatically – and stood its ground.

Loizos Heracleous, a professor of strategy and organization at the University of Warwick, UK, and Luh Luh Lan, associate professor of law at the National University of Singapore, offer companies what has to be a contrary opinion:

Oddly, no previous management research has looked at what the legal literature says about the topic, so we conducted a systematic analysis of a century’s worth of legal theory and precedent. It turns out that the law provides a surprisingly clear answer: Shareholders do not own the corporation, which is an autonomous legal person.

The two go on to say that boards can put their own judgment ahead of shareholder interests in making decisions such as whether to be acquired:

What’s more, when directors go against shareholder wishes – even when a loss of value is documented – courts side with directors the vast majority of the time.

Directors are mostly misinformed about their obligations, the profs write.

As an investor relations practitioner (and small shareholder of a few companies), I disagree with the academics. My core philosophy of IR is that management and boards should treat shareowners as exactly that – the owners of the company.

In the cultural funk that seems to follow the pain of each recession or financial crisis, we are once again hearing voices that declare our companies should lay aside the self-interest of shareholders and pursue the greater good.

Harvard and other universities seem to be advocating on this issue: In an HBR article last summer, a Stanford business prof made a similar point, arguing that stakeholders, rather than shareholders, should come first in corporate decision making.

What do you think? Share your comments by clicking below, or vote in this poll:

© 2010 Johnson Strategic Communications Inc.

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Politics & proxy proposals

January 22, 2010

Update: Activists announce Feb. 4 that they are organizing for proxy fights and lobbying efforts to oppose corporate political involvement. The effort is under the rubric of ShareOwners.org.

The ink is barely dry on the US Supreme Court decision to allow corporations to spend money on political ads, but one likely consequence is that activist shareholders will gain fresh momentum for a wave of proxy proposals seeking to limit or prohibit political spending by public companies.

While political junkies are dithering about how corporate money might sway the 2010 elections, corporations and investor relations professionals should realize that the Jan. 21 Citizens United decision presages a different kind of elections: more shareholder proposals on political activity and spending.

Leading the charge on this issue since 2003, a Washington advocacy group called the Center for Political Accountability has worked with labor unions, religious groups and others to file proxy proposals – more than 60 in 2008 and again in 2009. These generally would require semi-annual reports describing political contributions and who makes the decisions – posted on company websites – along with special oversight by boards of directors of political efforts.

Within hours, the Center for Political Accountability announced the Supreme Court ruling makes it “more critical” to press corporations for change on this issue. The advocacy group negotiates for self-policing by companies it targets, and it says more than 65 companies have adopted disclosure and board supervision.

Since shareholder activism may be Plan B for labor unions and liberal groups seeking to curb corporate money that might fund election efforts, I’m guessing we’ll see a lot more proxy proposals.

Of course, Plan C might be for Congress or the Securities and Exchange Commission to get into the act by requiring some form of disclosure or oversight of corporate political giving. Stay tuned.

© 2010 Johnson Strategic Communications Inc.

Oh, good (for now anyway)

October 2, 2009

One regulatory reform proposal has slowed down a bit, at least for now: The Securities and Exchange Commission doesn’t plan to vote until early 2010 on a “proxy access” rule, which would help shareholder activists nominate slates for corporate boards, The Wall Street Journal reports today.

Delay of an SEC vote from autumn to January or February means companies wouldn’t have to contend with direct proxy access in the spring 2010 proxy season, the WSJ notes. That would offer a breather for corporate staffs – and maybe some embattled corporate boards – amid a wave of potential new regulation.

Proposed in May, the SEC proxy access rule (if passed) would give shareholders a “right” to have their board nominees listed in a company’s proxy materials -empowering dissidents who might otherwise be shut out. To qualify for submitting board candidates, shareholders would need to hold a minimum of 1% of the shares for larger firms; 3% for mid-sized companies; and 5% for small firms.

SEC Chairman Mary Schapiro favors the proposal, citing the financial crisis as evidence that boards need more accountability.

Business groups like the National Investor Relations Institute oppose the idea. President & CEO Jeff Morgan said in NIRI’s comment letter to the SEC:

Possible side effects of a federal proxy access rule include increased costs to public companies to ensure valid nominations are included on the proxy, an increased influence of activists with narrow economic interests that run counter to that of long-term shareholders, a continued reduction of individual investors’ proxy voting influence and the possibility for decreased board effectiveness.

Morgan favors company-initiated changes in the proxy process, tailored to the varied interests and circumstances of individual companies. (See Morgan’s comments on a range of regulatory issues in his President’s Blog at the NIRI website, or a quick summary in this IR Café post. Broc Romanek gives an overview of comment letters on proxy access in a post at TheCorporateCounsel.net.)

“Proxy access” hasn’t gone away – just slipped a notch in the Washington timetable.

My own opinion: Handing more power to hedge funds, social activists or union pension funds isn’t really a good “fix” for corporate blunders or misdeeds. Activists follow their own political or economic agendas – not necessarily in the best interest of shareholders. Companies that destroy shareholder value, in my opinion, are punished in the market. And their CEOs and boards often share in the downfall.

What’s your opinion? And have you or your top management spoken out?

Watching Washington

September 29, 2009

All eyes are on Washington this fall, as the country watches hope and change take hold through new laws and regulations. When NIRI President and CEO Jeff Morgan briefed a group of investor relations people and corporate lawyers in Kansas City on changes coming our way from DC, “scary” was a word that kept recurring.

Jeff Morgan 9-29-09“There are a lot of scary things happening in Washington, and some potentially good things happening in Washington,” Morgan said Tuesday evening at the NIRI Kansas City chapter meeting.

Motivated by the financial crisis, Morgan noted, politicians have turned from talk to action on regulatory issues that have been around for years. Rightly or wrongly, he added, politicians see only two causes for the financial crisis: corporate greed and lack of adequate regulation. So they are bent on fixing those problems.

Morgan said significant changes in the way corporations are governed are in the works in Congress and at the Securities and Exchange Commission (SEC):

  • “Say on pay” proxy votes and input from a federal “pay czar,” initially targeting financial companies that got bailouts, could be expanded by Congress to all public companies.
  • If say on pay spreads, institutional investors – many of whom lack the staff to examine every executive pay proposal – would outsource the research and perhaps the voting to RiskMetrics Group. RiskMetrics sells governance advice to companies, and chastises those who don’t measure up to its standards.
  • An SEC proxy access proposal to expand shareholders’ ability to nominate board members seems likely to take effect, and Congress could weigh in to expand the mandates. That would empower activist investors such as union pension funds to target companies for changes in governance.
  • An SEC change in Rule 452 to eliminate broker discretionary voting, starting January 2010, seems likely to disrupt voting of retail stockholders’ share.
  • Various proposals are kicking around Congress on board compensation committees, separating the CEO and chairman roles, requiring certification and training for directors, eliminating staggered boards and other issues.

What can companies do? Get senior management to reach out to Congress with the public-company viewpoint on proposals for federal intervention. Take pre-emptive action by implementing compensation and proxy access programs designed to enhance, rather than put a strangle hold on, good governance for companies.

Two good sources on legislative and regulatory changes are Jeff Morgan’s blog on NIRI.org and Broc Romanek’s blog at TheCorporateCounsel.net.

We’d better be watching Washington. Says Morgan: “Corporations are the lifeblood of America, and we’re doing things that are dangerous to those corporations.”

Quote, unquote – Proxy EXcess

August 26, 2009

Discussion of the Securities and Exchange Commission‘s proposed new “proxy access” rule, aimed at giving activist shareholders an easier shot at electing members or slates to boards of directors, can get pretty arcane.

So I was glad to see, in today’s Wall Street Journal, a good primer on 14a-11 and a succinct and quotable quote that, to me, sums up the proposed change. Says lawyer John Finley of the New York firm Simpson Thacher & Bartlett:

It’s the biggest change relating to corporate governance ever proposed by the SEC. Period. It gives activists the ultimate vehicle to express dissatisfaction with a board, the ability to replace board members at the company’s expense.

Business lobbying against the change is ramping up toward the post-Labor Day push. That, of course, is when politicians return to Washington and harvest season begins for the crop of governmental mischief planted earlier in the year.

Maybe we could rename this particular proposal “Proxy Excess.”

IR as a mystery thriller

August 22, 2009

Investor relations as a profession doesn’t often make Page 1, but today’s Wall Street Journal casts IR in a starring role in Deutsche Bank‘s covert maneuvering against a dissident shareholder and courtroom enemy.

“Banker, Gadfly, Lawyer, Spy” is a mystery thriller worthy of a John Grisham novel. For IROs, the story is just that: a good yarn to read on a late-summer weekend. Entertainment, unfortunately at the expense of errant corporate staffers.

The story has everything: a private investigator with two code-named teams, rich and powerful enemies in German corporate suites and a Mediterranean isle, a young lawyer suspected of posing in a job interview to gather intel at a plaintiff’s law firm, even an elusive Brazilian seductress. Too bad it’s not fiction.

Deutsche Bank’s head of investor relations was let go when the corporate snooping and surveillance became a scandal, and there are ongoing investigations – not to mention that litigious shareholder, a target of the bank’s “Magnum PI” efforts.

By the way, Deutsche Bank issued a press release July 22 with its own somewhat dry version of what it has found looking into the company’s snooping activities. The bank said the “incidents originated from mandates initiated to achieve legitimate goals, but, during the course of these mandates, the external service providers retained by the Bank engaged in questionable activities.”

IR people should read today’s WSJ piece, simply because IR doesn’t usually make headline news. You might even be prepared to tell co-workers, “No, we don’t generally spy on shareholders (or anyone else).” There is no practical guidance in this story for doing the actual job of IR – other than an implied warning.

It’s a cautionary tale that says don’t get caught up in a corporate “battle” that later will be viewed as corporate wrongdoing (see last month’s posts, Someone should’ve said no and On the ethics front …). The messy consequences are sad. After all, no one wants to wind up on Page 1 of the Wall Street Journal this way.

On the ethics front …

July 22, 2009

Investor relations professionals need to stand on our own ethically, thinking through and following our convictions on what’s right or wrong. The Wall Street Journal brought a reminder yesterday of the need for personal responsibility with news that the head of investor relations for Deutsche Bank has been dismissed.

You may remember the story earlier (“Someone should’ve said No“) about Deutsche Bank hiring private investigators to spy on members of its management and supervisory boards – and an activist shareholder.

Now the tale unfolds further with news of the firing of two executives: Deutsche Bank’s head of investor relations and head of corporate security in Germany. One of four surreptitious surveillance actions cited in press reports involved a dissident shareholder and a media mogul who was in a legal fight with the bank.

To be clear, I have no first-hand knowledge and wouldn’t attempt to judge what Deutsche Bank or its people did. But the reputational consequences, from a corporate and personal standpoint, are obvious. Yesterday’s WSJ headline said “Deutsche Bank Fires Two in Spying Probe.” The story continues to dribble out, with more details in today’s WSJ. In Germany, where privacy and “big brother” tactics are a sensitive topic, newsmagazine Der Spiegel has aggressively reported this story.

My point on ethics and personal responsibility is this: In the heat of battle, when the company is under attack and the world looks like “Us vs. Them,” be careful. Go back to your core principles: telling the truth, obeying the law, treating others as you would want to be treated, whatever convictions shape your outlook on life. Seek guidance in places like the NIRI Code of Ethics: Although codes won’t offer a specific rule for something like hiring a private eye, they do provide principles.

And consider how any action you take might appear in the harsh light of public disclosure a year or two later. Your responsibility to decide on your actions isn’t erased because you’re part of a larger corporate staff. Taking a stand just might save the company from serious reputational damage. And, down the road, it might keep you out of a headline that says “… Fires Two in (Whatever) Probe.”

Someone should’ve said no

July 6, 2009

Well, there’s knowing your shareholders – and then there’s going way too far.

The German magazine Der Spiegel reports today that the country’s largest bank, Deutsche Bank, hired private investigators to look into members of its management and supervisory boards – and a pesky shareholder.

To be sure, the bank was investigating information leaks it saw as threatening – but it seems obvious someone should have said “No.” Now, the bank faces reputational damage, scrutiny of top executives’ roles – and possible legal action.

A 2001 case involved a union representative on the company’s supervisory board, suspected of leaking earnings info to the press. In 2006, the bank investigated contacts between management board members and German media mogul Leo Kirch, who was tangling with the bank legally. Among the targets, Spiegel says:

The bank also had external helpers investigate a shareholder believed to have links with Kirch – Michael Bohndorf, a lawyer who resides on the island of Ibiza. The investigators compiled detailed reports on his movements and even looked into whether he had any personal weaknesses: alcohol, gambling, women? One insider reports that the agency resorted to hiring women to test him.

For years, Bohndorf has been annoying Deutsche Bank by asking dozens of questions at annual shareholder meetings and taking legal action if his questions aren’t answered. The bank has already informed Bohndorf of the spying operation and apologized for it.

Two other German companies, Deutsche Telekom and Deutsche Bahn, face spying scandals. American firms have fallen into this trap in the past.

When the company is in the heat of battle – litigation, proxy fight, M&A contest – a mood of paranoia can take over in the executive suite. But when it comes to violating the law – or doing something that will look stupid in The New York Times or Der Spiegel – someone on staff should be saying “No. Don’t go there.”

The sanity check, sometimes, might even come from investor relations.

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.

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.