The Way We See It – Commentary from The Altman Group

The SEC Deputizes Investors I:  Preparing for the Age of the Sheriffs – What Color Are Their Hats?
By Francis H. Byrd, Managing Director, Corporate Governance Practice Co-Leader

The SEC announced last week that it would move forward with a version of proxy access, a process that would grant dissident investors the right to have their candidates placed on the same proxy card with management’s nominees.  This leveling of the playing field on behalf of institutional investors has been cheered by investor advocates (see the Op-Ed piece by Anne Simpson of CalPERS in the FT above) and dreaded by American corporations (both the Business Roundtable (“BRT”) and the U.S. Chamber of Commerce (“USCC”) have roundly attacked the proposal).  Assuming the proposal or a modified form of it is eventually enacted - - assuming state law and other challenges fail issuers will be entering a new era.  How this new age plays out is not entirely clear, however, one could reasonable expect an increase in the number of proxy contests, vote no campaigns against directors and shareholder pressure on companies.

Both sides have powerful and legitimate concerns behind their arguments, but I’m not going to focus on their specific point and counterpoint at this time.  I want to discuss as a practical matter an issue that often gets missed in the usual screaming matches (institutional investors: “we need to stop those greedy executives with their compliant boards” versus large companies: “politicians and unions are out to destroy our American way of life”).  I have a somewhat different perspective from the various vantage points or seats at the table I’ve occupied at during my nearly 20 year career.  I’ve worked for a mutual fund firm, a proxy solicitor/IR firm, a major activist public pension fund and a leading global credit rating agency. 

Here’s my opinion:  The BRT and USCC are overly concerned about what the unions and public funds will and can do; seeing them largely as black hats. Should access become a reality I would advise them to prepare for more activism from the Ichans, Ackmans and Peltzes and hedge fund community generally (sometimes black or gray hats) than from the public pension and union funds.  The public funds and unions, even with the much reduced cost of a proxy contest – thanks to proxy access – can not act with the speed or deliberateness of hedge funds or shareholder activists.  Also as long-term investors, often in index funds that don’t allow for an arbitrage or a “Wall Street walk” mentality, the public pension funds are seeking long-term shareholder value and want to make sure the company will be in a position to provide those earnings to fund the mandatory retirement needs of their beneficiaries.  Union funds may have a more pointed agenda, however, since they rely on the votes of their much larger public fund allies to support their shareholder resolutions and will need to rely heavily on their support for any dissident slates they might propose.  I’ll raise another important issue in the form of a question: does any one know of any municipal, state or county government agency that can react with speed of hedge fund or asset management firm?  I expect the answer will be No! Yes, the public funds and unions will use their new found powers, but critics and observers should expect that those instances will (or would be) relatively rare.
 
So who will be the sheriffs of this new age?  Hedge funds and shareholder activists, like Phil Goldstein of Bulldog Investors and Nelson Peltz who took on Wendy’s and Heinz and there will be many others, especially as the cost of running a dissident slate drops to the cost of a postage stamp (to mail the names of the dissident slate to the company).  Some of these investors will be seeking to increase long-term value for all shareholders and others will be promoting strategies designed to create a short-term boost in the value of their own positions, but all will have been deputized to police board accountability and director oversight of management.  Companies should be mindful of the fact that all investors (sheriffs) can and do switch hats frequently. Those switches often depend on the level and quality of engagement between the company and the investor.  Sometime the color hat depends on whether you have a seat at the table.

Boards and managements need to spend more time preparing for the age of the sheriffs by identifying who their investors (white, gray or black hats) are and determining which set of sheriffs they should reach out to and how best to engage with them.

The Legal Opinion

This week we have two articles you should take time to review.  The first is a discussion on steps boards should take on oversight, strategic planning, takeover defenses, transformative transactions and liquidity by Terry M. Schpok, a partner in Akin Gump’s Dallas office has an interview with the Metropolitan Corporate Counsel newsletter. (Link to document)
The second, from Latham & Watkins, has a quick review and analysis of the SEC’s proxy access proposal and key provisions of Senator Schumer’s proposed bill on corporate governance.
(Link to document)

*Three Time Winner of TOPS Award (Top Overall Proxy Solicitor) presented by Stockholder Consulting Services.

* To learn more, call: Paul Schulman (201) 806-7300 or Mark Garofalo (646) 575-3507 or visit www.altmangroup.com to see the full results of the TOPS Survey