Our ”Number-One Thing” Warning Comes True…In Spades, As Does Our Warning Re: “Big Hats/No Cattle”: Things To Think On As You Plan For Next Year
The big spring meeting season proved the OPTIMIZER to be a mighty good predictor of the way things would go this year, if we do say so ourselves: So now’s the time, we say, to start looking and thinking and planning ahead with next year in mind:
Meetings were mostly peaceful, as predicted — and right now, we’d predict an even quieter 2014 – at least where sign-wavers, chanters and other actors-out are concerned: No “Pay your fair share of taxes” folk and no “99-percenters” to speak of. But as we always warn; (1) The need to be alert to and prepared for new and unexpected “flashpoints” is always critically important as you plan your Annual Meeting, (2) Never assume that the upcoming meeting will be “just like last year’s” (3) There’s no such thing as being “over-prepared” and (4) - and most important to remember - “The only meeting that really counts is your own!”
The mining industry suddenly became the focus of several flare-ups this season – where activists borrowed many of the “99-per-center” tactics. About 20 active and retired workers showed up to demonstrate at the Peabody Energy meeting in normally sleepy Gillette, Wyoming and three protestors were arrested for hanging and displaying banners in off- limits areas and PNC Finanacial – targeted as a lender to the mining industry by another 20 or so activists from the “Earth Quaker Action Team” – a new group, to us at least – had to cut its meeting short after protestors asked the bank to stop lending to mountain-top coal mining operations and began a sing-in with “Which side are you on.” This, dear readers, is why we always end our annual meeting tune-up articles and webcasts with the same reminder: To have an emergency script in hand in order to summarily conclude the meeting if you have to, for sanity’s and safety’s sake.
At Cablevision Systems the CEO called police into the company’s annual meeting to throw out protestors complaining about a labor dispute – after several warnings were ignored: A good excuse for us to remind again that companies - regardless of their size - and regardless of whether or not they are expecting trouble
- MUST have a clear and quickly enforceable plan – and enough people at the ready – to deal firmly with meeting attendees who do not respond to “fair warnings” that they are out of order…
Our prediction that many companies would haplessly ride into their meetings with “a big hat” (in the form of a high quorum number) “but no cattle” played out in spades this spring: CTH&A Inspectors of Election attended four meetings where one or more director candidates resigned the day before the meeting – rather than to be embarrassed by their low vote totals…which, as a consequence of their withdrawals as nominees, were never officially tabulated and reported. At least three of these fiascos could likely have been prevented, had the folks riding herd on the meeting done their math carefully, and developed and launched a decent program to round up the retail vote earlier-on. And readers, as we noted last issue – this makes all the directors feel under- protected – and uneasy – and it’s not good for your own careers.
The “poster child” for the “big hat, no cattle award” turned out to be Occidental Petroleum’s long and imperially reigning Chairman Ray Irani – where, after an earlier and very embarrassing flap, the board decided to cut the CEO’s tenure short - on short notice - then had to reverse course amid howls of protests from the investment community that Irani was plotting against his own CEO to entrench himself. Ultimately – and yet another unpleasant surprise to directors it seemed – it was Irani who was forced to step down from the board – two years ahead of schedule – when shareholders ended up voting against his reelection by a 3 to 1 margin. Here, we’d bet that a “retail reach-out program” would have been more likely to increase the votes-No…which is always something to think about too. We are also betting that the sudden resignation of long-term Avon Products board member and Chairman Fred Hassan – just a few days before Avon’s Annual Meeting was also prompted by similar low-vote-getting….though we’ll never know for sure. P.S. Most market-watchers now expect Oxy to split into three companies before long…so please read the next section with particular care – and please remember that the OPTIMIZER was way, way ahead of the curve in predicting this powerful new trend…
Our most important prediction in terms of a dramatically shifting governance landscape – that investors would increasingly hold directors’ feet to the fire over financial issues – and, in particular, their ‘stewardship’ of shareholder assets – was borne out in spades this season:
In the season’s most dramatic example of successfully holding directors’ feet to the fire, Amerada Hess settled the proxy fight launched by hedge-fund Elliott Management just hours before the meeting convened - basically caving on everything: Early on, Hess replaced four of its original candidates with new ones, in response to Elliott’s charges of cronyism. Then they promised to back two of Elliott’s three candidates if Elliott would back Hess’s five, which Elliott quickly nixed. Then – after an “all-nighter” at the Four Seasons Hotel – featuring players from Goldman Sachs, Wachtell, Lipton and MacKenzie Partners on the Amerada Hess side – with Paul Weiss and fast-emerging proxy-fight superstars Okapi Partners working for Elliott – Hess agreed to accept all three Elliott candidates – and to separate the roles of Chairman and CEO – and to have annual rather than staggered board elections to boot. Well beforehand, Hess had announced that it would sell its gas stations, raise its dividend and buy back stock, in an effort to raise the stock price and fend off unhappy investors. But despite these earlier moves, the company’s last minute “cattle calls” came up about 16 million votes short. [A secret source gave us a rundown of the fees that advisors booked here, and on the Amerada Hess side alone it is a truly staggering number.]
In yet another big development – and with a fresh new entrant on the holding-feet-to-fire scene, please note well – the California State Teachers’ Retirement System – and their ally and advisor Relational Investors LLC – which together held 7.3% of Timken Co. – saw their nonbinding resolution to split Timken in two achieve a 53% majority vote. Timken immediately formed a special committee of the board to evaluate the deal… “by the end of the third quarter.”
Also this spring, activist investors forced Murphy Oil Corp. to sell off its retail gas business and forced the firing and ouster from the board of SandRidge Energy’s CEO – who was accused of putting personal interests ahead of shareholder interests - with too-high pay, sweetheart deals with family controlled companies and poor financial results to boot - although his belated “booting” generated a $90 million severance package because the board deemed his dismissal to be “without cause.” (More to come on this one, we’d bet.)
As Jeffries & Co. analyst Subash Chandra summed up for the WSJ, “The fact that companies are thinking about returning cash and being accountable for their cash is a sea change.”
Despite all this, serial pot-stirrer Carl Icahn has had only modest successes so far this year: His proposal to have Transocean Ltd. pay a $4 a share dividend was defeated, in favor of a more modest company plan to pay out $2.24. But the Transocean chairman was forced off the board in favor of Icahn’s nominee. At Navistar, Icahn and Mark Rachesky (in a move that a Jeffries & Co. analyst said “suggests they have concluded that the current management’s plan may be an easier path to value”) settled their fight before the meeting – with Navistar agreeing to add three of the dissidents’ candidates to the board. And at Apple, despite his wins on the proxy front, David Einhorn’s campaign to return a lot more of Apple’s low-yielding cash hoard to investors seems to have fizzled out – along with Apple’s stock price too, we note with regret.
And at Dell – where activists contend that the plan to go private at $13.65 per share – led and largely funded by Michael Dell himself – will take significant shareholder value off the table and into the pockets of Dell and friends – the pot continues to boil: Icahn continues his usual huffing and puffing – to borrow big money for a big shareholder dividend, then to somehow muddle through – significantly poorer and deeper in debt as a public company. And big Dell investor Southeastern Asset Management – which says Dell is worth almost $24 a share, and which basically started the brouhaha – has taken half of its money off the table….in a sale to Icahn at $13. 35 a share – which is lower, please note, than Dell’s offer, and a lot less than Southeastern paid to accumulate its stake !
But in what we think is a huge new development on the “holding feet to fire” scene, Gary Lutin - the irrepressible factotum of the Shareholder Forum – and a former investment banker - has formed The Dell Valuation Trust - registered in Delaware - that will allow Dell shareholders who assign their interest to the trust to demand a valuation by the Delaware Court of Chancery – and meanwhile, in theory at least, (Lutin is still working on the details he says) to be able to monetize the appraisal rights themselves if they wish. Lutin’s new trust won a rousing endorsement from New York Times columnist Gretchen Morgenson in a lengthy June 23 column. She cited two studies of appraisal results – one that showed a median appraisal in court decided cases that was 50.2% over the initial buyout price and another – of 46 cases since 1985 – where the court found a lower value in only seven cases and where the medium premium was a whopping 72%…which is not far off the value gap that’s been cited for the Dell-sponsored deal. The Trust charges just a penny a share (with a $100 minimum) to exchange Dell shares for Trust units. “The analytical view of professional investors is fairly consistent” Lutin noted…“assuming appraisal rights are marketable, processing a demand essentially reserves a no risk option. Most investors look at this the same way Michael Dell does, and reach the same conclusion. They want the long term value of the company, not the short term value of the stock price.”
Meanwhile, even as we write, fresh new fires are being lit and directors’ feet are being dragged into them… almost every week it seems: Starboard just dropped its consent solicitation at Office Depot – and while it does not oppose the pending merger with OfficeMax, they now seek to add four new candidates to the new board, saying it needs to be “significantly enhanced.” Starboard, which replaced the entire six-member board slate at Tessera Technologies in May, also fired off a letter to Smithfield Foods, asking them to explore a breakup, rather than the planned sale to China’s Shuanghui International Holdings - which they believe will create greater shareholder value than the current all-cash offer.
Stay tuned for lots more action here…and for many more instances of “holding directors’ feet to the fire” over their stewardship of shareholder-owned assets – or the perceived lack thereof…we guarantee.
P.S. Our original article, “What’s The Next Big Thing in Corporate Governance” – which was in our 2nd Q 2011 edition – is still much worth reviewing, we think.
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