Francis H. Byrd, Managing Director & Corporate Governance Advisory Practice Co-Leader
The Forever War: Issuers and Institutional Investors – The Battle Continues!
As this commentary is being written it is impossible to determine the final fate and form of the financial regulatory reform bill in conference committee. Suffice it to say, the last three weeks have been a roller-coaster ride for both issuers and institutional investors experiencing the pleasant feeling of an anticipated victory or downcast at the prospects of defeat.
The pervasive sense is that the “war” between public companies and their institutional shareholders is coming to a climax, with a decisive victory for one side or the other that will resolve the conflict and set the stage for a new re-ordering. We, however, from our vantage point, do not view it quite that way. Let us discuss this in the context of a couple of the conferences we have had an opportunity to attend.
The first of these was sponsored by the Kaplan Fox law firm, a member of the plaintiffs’ bar. Kaplan Fox’s “Recovery Risk & Returns: A Summit on Corporate Governance for Institutional Investors”, was held June 3rd and 4th , and included leading institutional activists from the AFL-CIO, TIAA-CREF, CTW Investment Group (an arm of the union Change-To-Win), AFSCME, Amalgamated Bank, Long View Funds, and top hedge fund activists Bill Ackman (Pershing Square Capital Management), Jared Landow (Barington Capital Group) and Brian L. Schorr, Chief Legal Officer at Trian Fund Management. Also in attendance were a number of other state funds who have not been as active or visible but who view their losses during the financial crisis as a wake-up call for shareholder activism.
The tone, while not celebratory, was optimistically looking forward as panelists discussed how they, as investors, would utilize expected new powers from the reform bill to become better change agents and protectors of shareholder value. None of the institutional investors at the Kaplan Fox summit backed away from the prospect of hard company-by-company fighting over majority vote (they would like to see it expand to mid-size and small-cap issuers) or “Say on Pay” proposals, believing instead that if by some mischance those reforms were left out by the conference committee, it would not be the end of the crusade. Also, proxy access, in some usable form, was almost within reach. Access, according to the institutions present, would be utilized sparingly and only as a last resort – the nuclear weapon of corporate governance activism.
The most pointed issue among the activist institutions was the outcome of the Massey Energy vote, and the failure of the activist funds to oust the targeted members of the board. Finding ways to ensure that the institutions vote as a block on director withhold vote campaigns looks to be a focus of “off-season” work for these institutional shareholders.
On June 17th and 18th, at the annual Yale Governance conference of the Millstein Center for Corporate Governance and Performance the atmosphere had a decidedly different tone, as word filtered through the Thursday morning sessions that the majority vote provision had been dropped from the reform bill, and proxy access – the holy grail of institutional investor activism – would have stricter ownership requirements. The SEC’s had originally proposed a sliding scale of ownership percentages of from 1%, 3% and 5% (depending on a company’s market capitalization) for investors to seeking to use proxy access to propose a short slate. The investor would also need to have held the stock for one year. The conference committee proposal, as reported in the business media, would call for a mandatory 5% or greater ownership threshold for a shareholder looking to utilize proxy access – irrespective of a company’s market capitalization – and would call for a two year holding period. If these changes survive into the final bill, and become law, they would preclude the SEC of using rule-making authority to designate an ownership percentage below the 5% threshold or stock holding period of less than two years. Passage of these changes to proxy access ownership requirements, in the financial reform package, would effectively lock out the public pension and union funds that the access proposal appeared designed to empower.
Investor representatives among the attendees were angry and frustrated at the prospect of losing parts of the financial regulatory reform bill they deemed critical to reforming the corporate election system in the U.S. However, as the conference went on, no-one from the institutional investor community publicly or privately threw in the towel or discussed backing away from the goals embodied in majority vote or proxy access.
In fact, a focus of the conference was the discussion of collaborative investor action (again referring to the case of Massey Energy) on identifying prospective directors, and determining whether a company’s board has a handle on risk oversight or the need for a U.S. corporate governance code. This was no less an important point after it became clear that majority vote and proxy access were in legislative jeopardy.
Keep the Champagne on Ice
Should issuers win the day and remove or weaken all (or most) of the provisions of the reform package, causing the greatest concern for publicly-traded companies, the champagne best be kept on ice. While the participants (and their lobbyists) will feel as if they have been through the battle of Gettysburg it would not be wise to cast the institutional investor community in the role of the defeated Army of Northern Virginia.
The institutional activist community is willing to push, through the shareholder resolution process, majority vote, and a short slate reimbursement by-law (as per the Delaware law passed earlier this year), and will re-think proxy access. The activists have recognized that the majority vote protocol in the amended Rule 452 universe can provide them an opportunity to oust directors they perceive as having failed in their duty to shareholders.
And lest we forget, “Say on Pay” (SOP) in some form has survived and is likely to be in the final bill presented to President Obama. Investors and issuers (especially at Occidental, Motorola and KeyCorp) understand the havoc that a negative or failed vote on a management SOP vote can have.
What may have been avoided in the reform package are the broad strokes of federalism painted on corporate America in a “one-size fixes all” manner that would have placed all companies at-risk all at once. However, CalPERS (and the usual suspects – the NYC Retirement Systems & Pension Funds, the NYS Comptroller/Common Fund, the Connecticut State Treasurer, and as well as other public funds who have not been as active historically) plans to increase the number of companies in which proposals will be introduced in 2011. The institutions are preparing to fight this out company by company, and that may or may not produce a poor outcome, but it is certainly not an “ending.”
