Some Special Advice For CFOs – And For Small And Mid-Cap Companies – On “Engaging” Investors, And On The Rules Of Engagement… And On The Important Dos And Don’ts When It Comes To Being Prepared For A Potentially Unfriendly Approach By One Or More Investors…
An interview with Bruce Goldfarb, President & CEO and Patrick McHugh, Senior Managing Director of Okapi Partners
An interview with Bruce Goldfarb, President & CEO and Patrick McHugh, Senior Managing Director of Okapi Partners
“There is no doubt that having a dialogue is of huge value to any party in the proxy solicitation process. The side that stymies engagement always loses support”
The Optimizer: For starters, please give us a little background about Okapi Partners.
Goldfarb: Okapi Partners is a “strategic proxy solicitation and investor response firm” that Pat and I founded in early 2008. We recognized that clients wanted, and really needed to get senior level attention, particularly from people with relevant experience where communicating with investors, and getting them to take action is concerned. And, more than anything, they needed to develop very specific winning strategies.
I, for example, brought a lot of experience as a lawyer who had specialized in M&A and investment management activities, and as a former chairman of the Proxy Review Committee at a major institutional investment firm, followed by several years as a senior managing director at another proxy solicitation firm. This background allowed me to develop a great deal of insight into the way traditional institutional investors decide on how to vote. It also provided significant exposure to the ways that good advisors (on the Legal, PR and proxy fronts) help corporate clients.
Pat brought a great deal of practical, hands-on experience – both with the “mechanics” of proxy solicitation and in terms of strategy development and execution. He worked extensively with the retail and broker side, and with U.S. and non-U.S. institutions, and with less-traditional activist investors as well.
Steve Balet came to us from the London office of another major firm, where he worked with U.S. based and non-U.S. companies, both on domestic proxy matters and on numerous cross-border transactions. Steve also provided us with great practical experience in proxy fight strategy and tactics for companies and activists. He also focuses intensively on executive compensation matters. Laura Bissell, who heads our Mutual Funds Group, has very special expertise and insight into the way mutual fund investors make their voting decisions, and an extensive network of contacts there. She also has great skill on the operational side of our business, partly developed by working with banks and brokers on behalf of SunGard and partly through her work in the solicitation business.
The Optimizer: Are we right that 2010 seems to be shaping up to be a particularly big year for shareholder activism?
Goldfarb: We have been extremely busy – both with corporate clients and with activists – who are trying to evaluate the landscape for the 2010 annual meeting season. And yes, activists are looking at specific situations, and trying to gauge the likelihood of success in a proxy fight. But, given today’s economic environment, some companies are asking about potentially waging and winning a proxy fight – and others are concerned about their own potential for being singled out as targets. A fair number of clients have already received notifications of potentially unwanted actions under their advance notice bylaws. One of the top questions that activists are asking – and, we think, companies would be wise to ask this same question too, if they want to have a strong defense – is whether they have a message that will really resonate with voters.
McHugh: There has also been a ‘stirring of the waters’ on the M&A front. Investors are also looking closely at absolute and relative performance and asking how much is due to management and board action – or inaction – rather than to overall economic conditions. There will continue to be situations where activists will seek and win board seats this year.
The Optimizer: What about hedge funds and private equity investors, who seem to have taken some heavy hits of late?
Goldfarb: In many ways, the overall economic environment is actually more favorable for them. We see a lot more evaluation of potential transactions going on, with a real willingness to seriously kick the tires on deal-doing. Do not count them out: we predict more deals on the horizon.
McHugh: We also think there will be more IPOs coming out of private equity companies as part of their exit strategies. Here, true newcomers, who haven’t had to confront the many issues that come with being a public company, will spring up. From this group, we will see many new clients who are looking to prepare themselves for their next phase.
The Optimizer: Let’s talk a little about Director-elections in 2010. Are directors concerned? Do you see directors themselves driving change in the investor communications process and wanting to become more involved?
Goldfarb: Most directors recognize that driving change and overseeing the investor communications process is part of their role. And, since Sarbanes-Oxley, their interest in these matters has been heightened. As we go into 2010 the director election process has become a much more significant concern to them than ever before – and something of a scary prospect. How will their performance be perceived given the increasing scrutiny by activists and the increasing influence of voting advisory firms? Many directors have become well aware that it is increasingly “OK” for institutional investors to withhold votes from individual directors, and maybe even a signal of ‘good governance’ on their part to do so. Many directors have also become aware that the effects of any potential ‘vote-no’ or ‘withhold’ campaigns that may materialize will be compounded by the loss of the broker vote.
The Optimizer: What, exactly, does Okapi bring to the table here?
Goldfarb: Simply put, we run election campaigns for corporate clients. Where director elections are concerned, we provide evaluations of the candidates, and their experience, and on the impact this background will have on the campaign. Like a political pollster, we analyze the voter base - in this case, the shareholders - and provide projections of success. For activist clients who need to have competitive slates, we do similar evaluations. Unlike years past, there is no shortage of highly qualified shortslate candidates these days. In this atmosphere, there’s no fear that one would earn a ‘black mark’ by being a nominee on an activist slate.
McHugh: We also help clients to weigh the positives of each dissident against the negatives of incumbents, and vice versa. Activists have learned that they need to have a specific target on the management slate for each director they would want to replace with a candidate of their own. Another very strategic element we help with, which is a very important part of the process, is engagement -- that is, knowing exactly when to have a dialogue and with whom, in order to influence the outcomes - including the right institutions, proxy advisory firms and other large shareholders.
Goldfarb: We can’t stress this last point enough: The side that stymies engagement always loses support. We need to remember that past events and, currently, the press and the political process have fostered a climate of complete distrust; of management and boards by investors and of investors by other kinds of investors, and this lack of trust often skews the dialogue.
We are very concerned about messaging – and we help our clients work through it – along with their legal advisors, their PR firms, their IROs – to be sure their message resonates from the start. The right message translates to votes. Also, we must always make sure that the desire to take action actually occurs: That’s where an intensive, hands-on involvement in back-office processing becomes so important to get votes.
The Optimizer: We’d especially like to have your thoughts on actively reaching out to investors before there is an issue. It strikes us that such a campaign can potentially do an end-around where those paid proxy-advisors are concerned.
Goldfarb: A very high priority for institutional investors is to know that management has a robust dialogue with the board about the business plan, and that there is a strong focus on strategy, and on the long term. Thus, it strikes me as very important – and a very prescient use of time – for company management to solicit ideas, perceptions and opinions from its largest holders and to make dialogue part of the process, and to do it before investors themselves raise “issues”.
The Optimizer: What advice would you give to a company that is concerned about being ahead of the curve here? And especially to small and mid-cap companies that have limited resources to devote to such campaigns, and which, partially as a result, seem often to be taken by surprise by activists.
Goldfarb: My first thoughts are for CFOs – who often become the “accidental IRO” in such situations, and who often need guidance in this ancillary role. Unlike what CFOs are used to dealing with, the process is not always logical. For someone who’s majored in business or finance or accounting, it’s totally counterintuitive when quantitative performance measures have little or no influence on shareholder proponents. And frankly, while some activists are giving a bit more credit to performance measures in deciding how to vote, they don’t really correlate easily with individual director performance.
Most important, I’d say, is to know what kinds of investors you have – and to communicate with them in advance to the fullest extent you can - and ideally, before any issues arise. As part of ‘knowing your investors’ you need to track market sentiment and current investor hot-buttons and behaviors, since these will frame the issues if any issues arise. Sorry to say it, but getting management’s objectives achieved will depend partly on the work that was done in 2009. If little headway was made in terms of ‘knowing investors’ it will be that much harder, and will require a lot more effort if something comes up on short notice in 2010.
McHugh: The loss of the broker vote will have a big influence, as noted earlier, if ‘issues’ do arise. We are concerned that some investors - notably the “NOBOs” – will be over-contacted, and overwhelmed by the extra attention in 2010, and maybe turned-off by it. A review of the NOBO/OBO rules is really overdue. Companies also need to be aware of the potential power of the Internet, and of things like video-messaging, text messaging and ‘tweeting’ – and that activists will be making increasing use of such avenues.
Goldfarb: We expect that there will be a lot of purely opportunistic efforts, including fights for control in 2010, and that it will be a very productive year for activists. Thus, it’s important to have the right relationships in place – with investors and with your advisors. Companies should really be in a high state of readiness. Some should ask, “Are we a target?” even while other companies may be saying, “I think we’ve found a target.”
Some more practical advice: Pick the right advisors, of course. Develop a relationship with them. Earn trust, on all sides. The ability of advisors to help you is greatly enhanced when there is a real relationship. If your staff is small, it’s even more important to have good advisors. Make the most of what you do have: Can’t call your top-fifty investors? Call the top five…or the top ten.
The Optimizer: Any advice on WHO should be doing the investor outreach?... And about the potential involvement of Directors in the effort?
Goldfarb: If you do ‘know’ your investors, you’ll probably know who can best place the first call. We like the idea of forming “little teams” of two or three executives. This will help you figure out who will maintain the best dialogue going forward. We especially like to go as a team ourselves when we help clients: Different skills and skillsets build better and deeper levels of rapport, and lead to better ideas and better strategies.
McHugh: Most clients, and sometimes their law firms too, have never been involved in a proxy contest. But sometimes this is a good thing. People who are newcomers to this crazy environment can often enhance the value of a campaign by bringing a totally fresh perspective.
Goldfarb: As to Directors, many of them do want to be involved, and they can add a lot of value. But make sure they DO want to do it, and recognize that the biggest bang comes from having these leaders involved early in the process. You don’t ever want to be in the position of appearing to “escalate” the dialogue.
The Optimizer: Any other important “DON’Ts” we should know about?
Goldfarb: Never ignore a phone call from an investor. Never develop a “stonewall mentality” or let your management, or your advisors, foster a “siege-mentality” if you truly want to head the activists off at the pass. And this, above all, is the “name of the game”.