Early Returns From The 2015 Meeting Season: Activists Rev Their Motors At Full Speed
Many Seminal Developments To Watch… And Our Comments On Bad Advice… And Good
Barely a day has gone by this year when we haven’t read about a new activist investor demand for a company to re-think strategy, spin-off a business unit, or two or three, pay a special dividend, buy back more shares than originally planned – and, as often as not, to demand one or more seats on the board.
As companies ramp up for their annual meetings this season, the demands have been escalating, day by day. Here’s our review of the top new developments to watch – and to watch out for at your own company as the season progresses:
At least two of the world’s biggest institutional investors have sent strong signals this quarter that they intend to use their votes to enforce their top governance objectives: BlackRock revised its voting guidelines dramatically, saying it might vote against at least one of a company’s most tenured directors if there was “evidence of board entrenchment, insufficient attention to board diversity, and/or failure to promote adequate board succession planning” or if there are unspecified attendance issues…or if they change bylaws that change shareholder rights without seeking shareholder approval “within a reasonable period of time.” Wow! This can sure encompass a lot of companies, and a lot of unsuspecting directors…and will take many by surprise this season we predict. Vanguard was a bit more ‘guarded’ – but strongly suggested that they too will use the ballot box to express disapproval this season – especially at companies they feel “fail to engage”…Ouch! More potential surprises here at companies that may feel that all is A-OK, and their doors are always open to “engagement.”
Early in March, the $300 billion California Public Employees Retirement System (CALPers) revised its governance guidelines in a truly revolutionary way: deleting as its first principle that their governance decisions and practices “should focus the board’s attention on optimizing the company’s operating performance, profitability and returns to shareholders” – saying instead that companies they invest in are “expected to optimize operating performance, profitability and investment returns in a risk aware manner while conducting themselves with propriety and with a view toward responsible conduct.” Wow! A sea-change indeed in terms of their understanding of their fiduciary duties to investors – and lots of room for subjective judgments here…with lots of possible voting surprises too!
Another seminal development we think – and a clear sign that activism has gone mainstream in a totally new way – was the formation in January of an activist hedge fund by JPMorgan’s former CFO, Douglas Braunstein and James Woolery, the Chair- Elect at Cadwalader, Wickersham and Taft – one of the whitest of white-shoe firms…And, as a NY Times article reported, money has been pouring in from mainstream corporate leaders like senior officers of Thermo-Fischer, United Healthcare and retired CEOs like Ivan Seidenberg ex of Verizon and Bill Harrison, ex of JPMC.
A truly startling number to note as we enter the ‘high season’ for voting: Activist hedge funds now have $120 billion under management – up an eye-popping 30% vs. last year!
Recent figures from FactSet SharkWatch show the number of proxy fights rising from the low to mid 200s in the 2009 – 2013 period to 343 in 2014 - with the success rates for activists rising from the 50-60% range from 2008 through 2013 to a whopping 73% in 2014. (This last number partly reflects the fact that typically, nearly half of the fights that are launched end up settling before the meeting, which we are seeing this year too. But it also illustrates the high stakes of NOT trying to settle… much as we still love those fights!) Still, very scary news indeed for companies that come under attack.
And suddenly, on the corporate governance scene, it became pretty clear that the battles over proxy access proposals are basically over and done with – as big companies like Boston Properties, Prudential and roughly a dozen others so far adopt them voluntarily, while others, like BofA and G-E have adopted them as ‘tradeoffs’ for less savory proposals, and still others, like Apache, Citi et al have endorsed shareholder proposals for proxy access – all with the “3 and 3” percentage ownership and holding periods the SEC initially approved several years ago…before big companies sank the deal with a lawsuit they “won” against the SEC. We have been saying over and over that it’s no big deal either way, since it’s mighty rare for a company to flatly refuse to deal with big investor concerns about directors. But if they do, or if their efforts are seen as falling short, their opponents will opt for an out-and- out proxy fight, and run their OWN slate, on their own proxy card, rather than use ‘proxy access’. But there IS a danger that companies that resist a proxy access proposal will get targeted for much bigger, bolder moves – like a Vote-No campaign that will cause them to lose directors…so institutions can “send a message” that can’t be blithely ignored.
WE also say there’s a good chance that the SEC’s No-Action-Letter procedures may be dead too going forward, as we suggested they WERE, several issues ago: Why ask for no action letters at all, we said; just drop the proposals you feel don’t meet the rules, and let the proponents suck it up, or sue. And now, with the SEC staff ’s ability to rule on proposals that were designed to trump a similar but not identical shareholder proposal on hold indefinitely, there’s a danger the no-action-letter safety valve will become permanently unreliable or maybe shut down altogether.
As we warned issuers when they worked so hard to sink proxy access “be careful of getting what you wish for.”And now, “private ordering” does not always seem to be the easiest or best option at all…unless the new ‘order of the day’ is for companies to adopt a proxy access rule with the original 3:3 hurdles asap…
Two meetings to watch in particular:
First, Bank of America’s - and their plan to combine the CEO’s and Chairman’s roles: Watch for potential retaliation against a board that overrode a 2009 shareholder approved resolution to split the two offices, which BofA initially DID. BofA offered up two sops – agreeing to proxy access and to a disclosure agreement re claw-backs on executive pay…But will it be enough to elect all of their directors, given the wild cards noted above?
DuPont’s annual meeting is not just an out-and-out proxy fight but a down-and-dirty one – against the activist Trian Fund and vs. Co-founder Norman Peltz in particular. This situation is unusual in several ways: First off, DuPont’s financial performance over the past few years has been truly stellar. And normally, Trian, and Peltz himself, act more like “corporate squires” – as Peltz set out to do, or so it seemed. And Trian’s record, at companies like Heinz, P&G and numerous others has produced mega-value for investors: Voting with Peltz has produced literal gushers of money. But lately, according to Yale prof Jeffrey Sonnenfeld, writing in a 4/2 WSJ op-ed article, Trian’s performance has lagged DuPont’s – and the S&P’s – by a big margin - or so he alleged; 8.8% in 2014 or almost 5 percentage points lower than the S&P’s ….and a paltry 0.9% vs. 5.9% in 2012. Oddest of all, perhaps (although we have been writing for years that “proxy fights are always ‘personal’”) this DOES seem to have devolved into a personal fight against Peltz himself – after DuPont agreed to add at least one Trian-nominated director, but flatly refused to add him to the board, as he’d asked. And both sides have been dredging up alleged ‘dirty deeds’ on a weekly basis. Peltz scored huge points in our book vs the diligence of the incumbent directors when he pointed out that a company that was sold for $4 billion in 2012 quickly increased its earnings by a whopping 140%. Then he took aim at the “governance provisions” DuPont had written in for the impending spin-off of hemours, a ‘performance chemicals’ unit, that install a staggered board, do not permit any shareholder actions by written consent, call for a whopping 35% vote to call a special meeting and, worst of all, would require an impossible-to-achieve 80% vote to change the charter. Who dreamed this up??...Then, as we were still drafting this issue, Trian’s co-founder Ed Garden fired back at Sonnenfeld’s op-ed in a big way: “The fact is we have generated a return of approximately 137% net of fees since inception, outpacing the S&P 500 by approximately 2,900 basis points. Shareholder returns at Trian portfolio companies on which Nelson Peltz served or serves on the board, from the day we invested until today, outperformed the S&P by an average of almost 900 basis points annually” he noted in a letter to WSJ editor on April 10th. “Mr. Sonnenfeld’s selective use of data is blatant in citing Trian’s returns for 2014 and 2012 – but not including 2013. Not only is his 2014 figure wrong (our return was actually 11% net of fees), but he omits 2013 when we were up 40% net of fees, significantly outperforming the S&P.” Who advised Sonnenfeld, we’d ask…And who put him up to trashing Trian in such an ill-informed, numerically selective – and badly flawed manner?
This prompts us to add a few notes that seem particularly important to note as we gear up for this season, on the subject of…BAD ADVICE…which seems to be dished out with alarming frequency, and with many potentially dangerous side effects of late…
What made BofA directors decide to unilaterally scrap the shareholder-approved bylaw calling for a separate Chairman… apparently without any consultation or so much as a heads-up to institutional investors who feel so strongly about this subject? What made Dow offer up three existing directors – hoping to pacify Nelson Peltz and co. – only to have to offer up yet another position, come the end? What made directors at Amerada Hess or Sotheby’s think they could snatch a victory from the jaws of clearly impending defeats? And, while the whole DuPont vs. Peltz thing is riddled with bad advice in our book - in that no one seems to be working toward a ‘happy ending’ to what now seems like an entirely personal spat – it pales by comparison to the bad advice – and director consent, of course – at Darden Restaurants, where directors delivered even more, and sharper sticks in the eyes of investors by precipitously spinning off its Red Lobster chain when investors were calling for a broader restructuring of the entire business, ignoring pleas to consult with investors, and to add a few new directors…all of which culminated in the ouster of the entire board.
So here’s some GOOD ADVICE as we go into the 2015 meeting season: Revisit and carefully consider the advice that activist Greg Taxin offered up in our year-end issue about bad advice and bad advisors: “Where activist efforts are concerned, officers and directors need to steel themselves against what is basically a mercenary army of people, who like war. Make sure you do not get yourselves inextricably on this path because the people driving the train are ‘built for war’.” (It’s on our website, www.OptimizerOnline.com – under “What’s New.”)