Francis H. Byrd, Managing Director, Corporate Governance Advisory Practice Co-Leader
Coming Events Cast Their Shadow
Proverbial Meaning: There are usually warnings or signals when an important event approaches.
Literal Origins: Sometimes a string of minor events can lead up to a larger event, often in a predictable fashion – casting a metaphorical shadow as the event looms.
In this week’s newsletter, there are four stories that appear as shadows of future shareholder activism. The most obvious is the story on the progress of Senator Christopher Dodd’s financial reform bill, and whether proxy access – the holy grail of institutional investor governance advocates – will remain in the bill. The other story, in our Investor Action section, speaking to direct action by shareholders, is the Agenda story on work being done by CalPERS and CalSTRS to develop a database of prospective dissident director nominees for short slates for use under a proxy access regime (if proxy access is actually enacted). However, these issues are essentially known to the market, are not surprises, and to a certain extent have already been expected.
The Altman Group, like other advisors to managements and boards, has advocated that companies prepare for the advent of the proxy access era. We have advised companies to maintain more frequent and substantial contact with their shareholders, and to have a better sense of what their key concerns are, be it performance or governance-related. A better question to ask is whether we will experience a dramatic change in the environment for public companies. Two of the stories we highlight this week speak to that issue. The first, in last week’s New York Times, discusses the pressures facing public pension funds. These funds, many of whom are not earning anywhere near their actuarial assumption, are faced with the need to invest in higher yield investments and are seeking out alternatives – such as hedge funds. The second story, from Bloomberg, reports on efforts by the FDIC to encourage public funds to invest in the weak banks and repackaged financial institutions in the agency’s ever increasing portfolio. These stories speak to changes in the thinking and activities of the stewards of good governance and long-termism. These public funds face serious long-term funding problems that could create the need for short-term investment horizons to meet the needs of their retirees. Yes, one could say this trend has been taking place for quite awhile. We would agree; however, the credit and financial crises of the last three years have taken their toll on municipal and state budgets, and many public funds are limiting governmental funding options. Additionally, many public funds were not fully funded during the good years, and will now struggle harder during this lean financial period to find investments to meet their future retirement payout obligations.
What does that mean for public companies? Companies will face a much tougher environment where executive managements and boards of directors will be pressured by shareholders who will be much more critical (and watchful) of risk and performance issues. As the public funds (and their Taft-Hartley allies) diversify from equities to find greater Alpha, will they act more like hedge funds they may hire and press companies for faster growth and actions that have an immediate, positive impact on the stock price, or will they maintain their stance on the longer term view of their portfolio companies growth? Will they press their hedge fund managers on voting policies as they have their index and equity managers in the past?
The fate of proxy access, in the U.S. Senate and at the SEC, is important and the outcome will have an immediate and lasting impact on the nature of the relationship between companies, boards of directors and shareholders. But the pressure faced by institutional investors points to a more contentious future environment for public companies. Companies will be need to develop a more coordinated approach internally (with teams from investor relations, the corporate secretarial function and the legal department working more closely together) in managing relationships with investors, and from their advisors (proxy solicitors, outside counsel and financial) to cover more territory and better understand the actions and motivations of their investor base.
Educating the Retail Investor Base on the Importance of Voting Proxies
With the amendment of NYSE Rule 452 and the current state of Notice & Access it is expected that proxy voting among retail investors will decrease sharply. In an effort to educate retail shareholders, the Securities and Exchange Commission, through its Office of Investor Education and Advocacy, has developed a website to assist retail investors with understanding the importance and necessity of voting their proxies.
The web site, http://investor.gov/proxy-matters/ provides retail investors with information about the voting process and has a series of frequently asked questions (FAQs) on subjects such as Corporate Elections, Receiving Proxy Materials and Voting Procedures.
The Altman Group applauds the SEC’s outreach efforts; however, we continue to believe that systematic solutions such as those outlined in our proposals on reforming proxy mechanics would be a significant step in a long-term effort to increase retail shareholder voting levels.
To read our reform proposals, please click the following links:
http://www.altmangroup.com/pdf/
ProxyMechanicsTheAltmanGroup.pdf
A related position paper was submitted to the SEC in October 2009, and is posted at:
http://www.altmangroup.com/pdf/
PracticalSolutionTAG.pdf
