PROXY FIGHTS SHRINK IN NUMBER…BUT THE INTENSITY GROWS BIG-TIME
The just-out issue of Broadridge’s Proxy Pulse newsletter reports that so far this year, proxy contests have decreased markedly vs. last.
Their survey of the 3,379 shareholder meetings that occurred from Jan. 1 through June 30, 2017 reports that there were 38 contests, compared to 47 last year - a 19% decline - and that “Some high-profile contested solicitations” [actually, at least as many as the nine “missing fights,” we’d say, and probably more] “were decided in negotiations before a shareholder vote”…and in many cases, we’d add, well before the first fight-letter was even filed.
Also noteworthy, “The average length of campaigns decreased drastically in the first half of 2017: 44 days, compared to 109 days for the entire year in 2016” Broadridge reported - but this was due almost entirely to the big number of quickly settled fights, we’d say, which cut the multiple mailings of fresh proxies and new “fight letters” on both sides by more than half. During Q1 and Q2 2017, 63 total board seats were won in proxy contests, compared to 139 for all of 2016 Broadridge reported - but we would estimate that activists picked up 40 or more board seats in 2017 to date as part of settlement deals.
The steadily growing trend to settle with activists was certainly a good thing for activists - who mostly - and sometimes entirely got their way without a fight. And arguably it was good for shareholders too - who otherwise would have had to pick up the huge bills that proxy fights generate, and who almost always see a short-term pop in the strike price to boot whenever activists knock.The flip side of these developments, however, is that when corporate targets decide to fight rather than to settle, the intensity of the campaigns on both sides ratchets up in a huge way…witness the still ongoing fight by Trian to seat a single - and singularly successful and well-regarded director like Nelson Peltz on the P&G board.
THE MOST EXPENSIVE PROXY FIGHT IN HISTORY?
In one of his early fight letters, Peltz estimated that the fight will cost P&G shareholders over $100 million…citing their multiple mailings, the hiring of two proxy solicitors, four investment banks, a financial public relations firm and two “High Powered Law Firms.” …plus the whopping out-of-pocket expenses for “millions of retail shareholder calls.” He estimated his own costs at $35 million - but that did not include his own bevy of SEC lawyers, PR flaks, proxy-fighters and other “advisors” and the millions (?) of telephone calls that his side made - where the costs are never disclosed.
In another big and ultimately costly ratcheting-up move that’s characteristic of fights to the bitter end, P&G’s fight letters were intensely personal from the get-go. This, in our experience, is always a signal that the management side is on the ropes, which is not a good signal to send. But that aside, the P&G potshots at Peltz - who has made literally billions of dollars for investors in companies in once similarly-stodgy and underperforming companies like Snapple, Heinz and Kraft/Mondelez - were clearly not on the money. And depicting their highly successful and still very much with-it former CFO, an acknowledged mentor of the current CEO no less, who is still widely admired by P&G staffers but who joined the Trian team, as being “out of touch” - did not comport with reality either, as his presentations to shareholders clearly indicated. “Going negative” usually strikes a very sour note with voters….But please note the biggest cost to shareholders of all: It makes it infinitely harder to move on in a good way, whether or not the insurgent(s) win a board seat.
WE WERE BETTING THAT PELTZ WOULD WIN A SEAT:
Mid-campaign, P&G earnings - while modestly improved over recent quarters - showed declining market share in every major product line. Hardly a good case for the idea that the Management plans were fast kicking in as advertised. And while yes, the results were basically in line with peers for a change, much of the vaunted increase in TSR seemed to us to be due directly to the Peltz campaign that hyped the stock price, rather than to the fundamentals.
Both Glass-Lewis and ISS recommended a vote for Peltz, and large investors seemed to be weighing in for him every day. (As it turned out, Vanguard, with a 7% stake, voted for the management slate, while BlackRock and State Street, with 10% combined, voted for Peltz, as did CalSTERS, which noted a nearly 50:50 split in the vote in a post-meeting call for action.)
In a move that we felt would tip the scales in Trian’s favor, the very day before the P&G vote, GE - which is suffering essentially identical ailments - voluntarily added Peltz’s partner at Trian, Ed Gardner, to the GE board - and replaced three of their top managers with younger blood.
The key to the final outcome will turn, as expected, on the “retail vote” - and, in the case of P&G, primarily on the employee and retiree votes: P&G has one of the largest percentages of individual investors anywhere - over 40% the newspapers say. And the registry is top-heavy with employees, retirees - and with current and former members of the very-senior-management ranks, who hold much bigger than average stakes. Most of these people truly love P&G - and have made huge amounts of money with P&G, often over multiple generations. For well over `100 years the first commandment of P&G retirees has been “Never sell your P&G stock” - which has been good advice indeed: A recent Forbes magazine look-back over the hundred years since its own founding noted that $1,000 invested in P&G in 1917 would amount to $1,596,006.38 today - producing a mind-boggling return of 159,509%. And that is excluding all of the dividends, as well as all of the huge compounding that loyal dividend re-investors would have gotten to boot. Our own grandchildren are sixth generation P&G investors, and we know that they, and we, as fourth generation investors are far from alone here.
But the past ten years of massive underperformance that persisted until Peltz came on the scene has clearly left retail investors far behind where they’d be on a ten-year basis if they’d invested in peer companies instead: “Each share you own would be worth as much as $160 [vs. the then current $92] if P&G had simply kept pace with its peers” Trian’s Sept. 25th letter to shareholders noted.
We were betting that this would resonate with long-termers big-time - and be enough for Peltz to eke out a victory in what seemed to us like a very modest “ask” for a single seat. Current employees were clearly and very understandably rooting for the management slate - and for “no change.” But if the final results are as close as they seem to be at present - a huge percentage of retirees were indeed in favor of change, and were unhappy enough to vote FOR change in fairly large numbers..
AN ACE IN THE HOLE FOR P&G - OR RATHER, A BIG WILD-CARD IN THE DECK - APPEARS TO BE THE EMPLOYEE OWNERSHIP PLAN VOTING, which reportedly comprises 7 ½% of the outstanding shares, and where the Plan Trustee appears to have voted the entire position “proportionately.” This surely gave management a huge edge in what is, apparently, a dead heat - even after the big boost. As close observers of proxy fights, the OPTIMIZER has repeatedly pointed out the “wild-card aspect” of proportional voting, and why, as a result - and also because one cannot cite a sensible rationale for having it, other than to give management an added edge most times - we hate it and feel it should be abandoned: In this case, as is normally the case, it seems to have worked to skew the vote very much in P&G’s favor. But before you look to have proportional voting in your own employee plans, please remember the Walt Disney election a few years back, when the small number of employee owners who bothered to vote, voted against Michael Eisner - and where proportional voting took him down.
We would not be at all surprised to see Peltz challenge the propriety of the Plan Trustee voting proportionately in such a close election - even though they may have had the right to do so. One could argue, of course, that the non-voters were, ipso facto, “indifferent” - but that, in our opinion, is a very different thing than having a significant number of them being automatically recorded as voting for the management slate by a Plan Trustee - especially in an election where the overall vote seems close to a 50:50 split. A very bad governance provision say we.
WE STILL PREDICT AN ULTIMATE VICTORY FOR PELTZ:
As we go to press, Peltz - who said his early morning count on the day of the meeting had him winning, is claiming not just a “dead heat” but having a 1% margin in his favor. The Inspectors of Election are scrambling to sort out and cast out the tens of thousands of duplicate and triplicate votes that were surely cast for both sides along the way, with no news yet as to when they will be prepared to report.
Regardless of the final tally however, one should note that the P&G fight is almost a precise re-run of Trian’s try to gain seats at DuPont - and to oust the CEO. There, however, “retail investor votes” ultimately decided the outcome by a fairly comfortable 5% margin for management. But please note well; while officially Peltz “lost” the proxy fight at DuPont, when the next quarter’s results were down instead of up, the CEO was gone in a flash, and Trian got virtually every other thing they’d asked for, literally overnight…We are betting that the same thing is likely to happen here.
We were stunned by the hubris of the P&G CEO - and his most senior board members as well - who asserted that they essentially had everything figured out and running on-track - and had no need for advice from the likes of Nelson Peltz. “I’m fired up!” the CEO noted post-meeting, when really, he should have been fired up long beforehand. So we’re betting that the CEO will soon meet the fate of all hubristic heroes, and get “fired up” for real unless he can work a miracle in six months or less.
ANOTHER BIG CHANGE ON THE PROXY FIGHT SCENE IS PLAYING OUT THESE DAYS: More and more non-public and non-profit organizations - like professional and trade associations - and even homeowners’ associations, for those of you in gated communities and condos - are experiencing proxy fights than ever before.
One major driver; many associations like these start out as “contested elections” - with more candidates than seats. And the old Gaston-Alphonse routine (“after YOU, dear Alphonse”) is no longer the mode du jour. This season our Team of Independent Inspectors handled two contested “association elections” and passed on two others as being too crazy to want to deal with. At one of the elections we Inspected, there were 28 candidates for 13 seats - and oops, the previous Inspector had announced the wrong winners last year. (Shades of the 2017 Oscar Awards!) This year, a fresh surprise, when a candidate that was way back in the pack passed up one of the most senior incumbents (an expected shoo-in) on the day of the meeting!
At another large association meeting - of physicians, that also had an “Insurance Trust” with its own board of Trustees - a director who had been ousted mid-year decided to run her own slate in opposition, and, while her slate did not win, she handily prevented the election of the management slate by pulling them below the required threshold, which was “a majority vote of all the eligible members.”
On the homeowners’ association front, a realtor friend had advised us to watch for major election battles here too, as “climate change issues” - like hurricanes, earthquakes and rising sea levels are causing needs for major infrastructure improvements, teeing up bitter battles royal between older and newer investors who’ll need to foot the bills. This is really the “wild west” of proxy fights, where we fielded four sets of frantic calls and e-mails from various association board members this season, with horror stories alleging rigged elections and severely conflicted Inspectors of Election who were appointed by and allegedly in cahoots with long entrenched board members and who were vastly overstepping the “duties of Inspectors” by attending “meet-and-greets,” officially “vetting candidates” - and summarily disqualifying some on specious grounds - and conducting bogus “electronic voting” during the meeting, where a running tally of their vote-counting work-in-progress was displayed while voting was still going on!!!