Early in my 26 years as a proxy consultant I learned that it was important to have a sense of each issuer's tolerance for opposition votes on proxy issues. In the early years of the governance reform movement many companies could be quite resolute and were willing to resist shareholder activists, oftentimes for years. Of course there were also some companies that never wanted to be seen as the “bad guy” and generally gave in to activists. But at the time of the corporate accounting scandals (i.e. Enron, Tyco etc.) some 10 years ago the balance shifted, and I now find that the majority of issuers are much more sensitive to shareholder pressure and much more willing to accede to shareholder demands.
Thus over the last decade or so most companies have given up their takeover defenses and agreed to various governance and compensation reforms. Some of this was high minded — “we want to have best-in-class governance.” Some of it was arrogance — “we don't need takeover defenses, we would never resist a legitimate offer.” Still others were out of resignation — “takeover defenses are going away.” I must confess I never really knew whether this was coming from the board or from management seeking to insulate the board. Either way, many companies barely put up a fight as governance advocates pushed through their reform items.
In fairness, it is also true that the rise of ISS and the other proxy advisors along with majority voting and the increased use of withhold voting in director elections has made resisting reform initiatives very difficult and sometimes pointless. Advisory votes are no longer really advisory.
Looking back, what did companies get for being so accommodating? More and more demands for reform, to the point where activists are seriously encroaching in areas that have traditionally been under the discretion of management and the board. Now, with the Dodd-Frank legislation in place, shareholders have the ability to challenge management's compensation via say on pay. And pending a legal challenge, shareholders will soon have proxy access. All of this has the potential to have a material impact on companies. At the very least it will occupy more of management resources and directors' time.
You may ask what's wrong with any of this? Shareholders are the owners of the company and they should have the ability to curb executive compensation, and they should have the ultimate discretion in a takeover situation. No disagreement there.
Looking closely at what really goes on, it seems that the motivation on the activist side is far from pure. These reforms are very often being pushed by labor groups, who are arguably doing it for social/political purposes, small individual gadflies, who are involved primarily for self aggrandizement, and activist hedge funds, who more often than not are looking to monetize their trades.
These activists are enabled by institutional investors who tend to vote more like portfolio holders than as shareholders, meaning portfolio considerations very often outweigh individual stockholding considerations when deciding proxy votes.
Moreover, these institutions which are supporting governance reforms may be in your stock one quarter and out the next. Others routinely lend away their shares and their voting rights. Those that follow proxy advisors often do so because they are passive or quantitative and don't know the issuer, or because their holding is too small to justify the time involved in making a thoughtful decision, or because they are too afraid to be second-guessed in the media and by regulators. And proxy advisor policies are suspected to be heavily influenced by the activists themselves.
With this in mind I have been urging clients to stop being so sensitive to voting outcomes. Develop thicker skin. Nowadays, opposition can't be avoided. It is unrealistic to expect the board to be elected with 95% support; 40% of votes cast in support for a shareholder proposal means that the proposal did not carry. Don't implement the proposal just because it almost won. And certainly don't lower the bar so that you feel compelled to act (as many companies do) if one-third or less of your shareholders oppose your position.
It is also critical to understand the detail behind the vote. A large visible client of our firm just received a sizable “against” vote on say on pay. But looking at the results we saw that the largest shareholders voted overwhelmingly for the company, while the opposition vote was driven almost exclusively by the ISS recommendation. Should this company take a scalpel to its compensation programs after a result like this? Many companies will be faced with this very question.
There are some institutional shareholders that can be counted on to be responsible proxy voters. They are not policy driven. They are not politicized and not bureaucratic. Their voting decisions are an integral part of their investment decisions. They do take stands, and they do push back sometimes, but they always vote as investors trying to earn a return on their investment, which is the way it should be. I urge my clients to identify these investors and to use them as a “moral compass” if you will. When you have the endorsement of shareholders like these you can trust that you are probably in a good place. â–
The author can be contacted at jmills@morrowco.com.