In early October, NIRI Boston co-hosted a special half-day event examining governance and proxy-related issues with Alliance Advisors and the Eastern New England Chapter of the Society for Corporate Governance. This event featured two panels of leading IR, legal, proxy solicitation and crisis communications experts.
The first panel, moderated by David Calusdian, EVP & Partner at Sharon Merrill Associates, focused on proxy season and governance issues with Rob Bradley, VP of IR at LogMeIn; Thomas Friedmann, Partner at Dechert; and Harry Pangas, Partner at Sutherland Asbill & Brennan. As a result of investor input, Tom remarked that Fortune 500 companies have increasingly been: (1) eliminating classified or staggered director elections; (2) adopting majority voting standards for director elections; and (3) dropping supermajority voting requirements. In the tech sector, Rob sees the volume of equity grants by companies and say-on-pay as two areas of increasing focus during proxy voting season. Harry noted that the most prevalent governance-related shareholder proposals in 2016 were those that sought to implement proxy access, a mechanism that allow shareholders to nominate directors if they own a certain percentage of shares for a prolonged period of time. Although Harry expects such proposals to rise from 115 last year to more than 200 this year, he noted that few shareholders have actually utilized this method of director nomination thus far.
Looking ahead to 2017, Tom expects majority voting, director election and proxy access to remain at the forefront. Over time, he also foresees an increase in proxy initiatives around sustainability and diversity, along with say-on-pay and disclosure regarding director compensation from related parties. All three panelists agreed that proactive outreach to institutional investors is the best way to anticipate and navigate potential shareholder activism.
The second panel, moderated by Waheed Hassan, Senior Managing Director of Alliance Advisors, walked through the lifecycle of a proxy contest with four panelists: Elise Caffrey, Senior Vice President of Investor Relations at iRobot, which recently went through an activist campaign and proxy battle; Jennifer Coonery, Advisory Director at Argyle and former Senior Counsel at Staples; Sebastian Niles, Partner at Wachtell Lipton; and Victoria Sivrais, Founding Partner at Clermont Partners. Waheed began by noting that activism as an investment class has nearly doubled from 2013 to 2015 with $170 billion in unlevered assets under management and that approximately 20% of campaigns are being run by first time activists. Victoria pointed out that she is seeing an increase in what she refers to as “reluctivists,” or institutional investors that begin the push for activism if they believe their concerns aren’t being addressed by management.
Phase 1 of the proxy contest lifecycle consisted of the initial approach by the activist, which is often in the form of calls into the company and meeting requests from junior analysts working for the activist firm. Jennifer believes it can be important to notify the Board at this stage if the firm is a known activist investor. Phase 2 of the lifecycle assumed the activist had filed a Schedule 13D disclosing a great than 5% stake in the company. Both Victoria and Elise believe that, in addition to internal FAQ prep work, leveraging key existing relationships with institutional holders, sell-side analysts, industry analysts and the financial press are critical to the company. Victoria believes that a company should get its fight team (including external legal, proxy solicitation and crisis communications counsel) in place at this stage. While some consultants have been known to recommend against shareholder outreach during this timeframe, all panelists advised against this unless there was a unique situation requiring it. Both Waheed and Sebastian typically advise companies to listen to shareholder concerns and feedback at this stage rather than publicly fire back at the activist.
Phase 3 assumed the activist filed a detailed “white paper” criticizing the company. Elise noted that the points made in the white paper regarding iRobot came as no surprise to the company based upon management’s previous interactions with the activist and input from other investors that had been contacted by the activist. Jennifer and Elise pointed out that the content and form of responses will differ on a case-by-case basis, and that companies that are in the process of considering changes recommended by the activist must be careful in how they respond publicly, if at all. Sebastian noted that companies often make structural changes at this stage, which can demonstrate their responsiveness and be viewed positively by institutional holders.
Phase 4 is the proxy fight. Panelists agreed that management should understand where institutional investors stand as it relates to the activists’ claims by now based on their outreach in prior phases. Elise advised that, while some shareholders may not agree with certain corporate strategies, management should clearly articulate why they believe their strategy is in the best interest of long-term holders.
In terms of key takeaways, panelists advised companies to: (1) regularly assess their stock performance, governance structures and corporate strategies to identify weaknesses in advance of an activist’s approach; (2) conduct perception audits to gauge investor sentiments and concerns; (3) establish strong external relationships/supporters and internal ties between IR and legal departments, which can pay big dividends during an activist campaign; and (4) maintain a proactive shareholder dialogue at all times, particularly during times of activism.