June 27, 2016 Bruce Goldfarb’s Op-Ed in Law360 on the 2016 Proxy Season
Law360, New York (June 24, 2016, 10:56 AM ET) —
When it comes to proxy contests and shareholder activism, the first half of 2016 was in many ways one for the record books. All told, there have been over 400 activist campaigns initiated worldwide this year, including more than 269 in the U.S. alone at the end of last month, according to Activist Insight. Based on rumored situations and how volatile markets impact the activist process, 2016 could likely be the most active year in history. Some large public companies including Yahoo, AIG, Pandora, United Continental Holdings and Xerox have found themselves in the crosshairs of activist investors, and many have adopted at least some of the demands put forth by investors.
In fact, one of the most striking changes in this year’s proxy season is the quality and tone of the dialogue between companies and their shareholders. Not only has it been more open, but companies and nonactivist investors are taking suggestions from activists more seriously.
The dialogue has opened up not only because activists have had success electing their nominees to corporate boards, but because corporations themselves are beginning to evaluate strategy from an investor perspective, in effect thinking more like activists. Boards are anticipating more demands from their shareholders and making strategic moves to increase shareholder value ahead of a possible proxy contest. Companies are also communicating with their large shareholders on a more regular basis, so if an activist decides to wage a public campaign, shareholders already know what the company’s long-term strategy is and the board and management can take a less defensive position.
Also driving changes is the increased involvement of many institutional investors in the voting process. Even investors described as “passive,” because investment strategy is quantitative or index-based, are more involved in voting decisions and overall business strategy than they ever have been. Large mutual fund companies and exchange-traded fund (ETF) sponsors are hiring experienced and thoughtful professionals who are taking a closer look at corporate elections, long-term strategy and governance matters.
As investors become more involved in corporate elections, they have been less reliant on proxy advisory firms such as Institutional Shareholder Services and Glass Lewis & Co. as the sole decision maker in how they vote (this trend was also driven by recent guidance from the U.S. Securities and Exchange Commission on the use of proxy advisers). The result is that voting patterns among big shareholders are becoming less predictable, and convincing shareholders to vote one way or another requires more strategic thought as well as legwork and engagement.
While large shareholders are becoming more thoughtful and engaged in the voting process, another change we’ve seen is the involvement of companies themselves in communicating to their shareholder base. In several activist situations this year, companies were much more targeted and less defensive in their communications with shareholders.
It used to be that once an activist investor showed up on a company’s doorstep, the board and management would immediately dig in for a long and expensive fight. That dynamic has changed dramatically, and in the first half of this year we have noticed the most pronounced shift thus far. Both companies and activist investors have come together and formed settlements or compromises that avoid long and expensive proxy fights. This year alone, parties have negotiated settlements in contested situations at Yahoo, United Continental and a number of other companies.
Companies are taking notice, and the most thoughtful among them are open to hearing suggestions from their shareholders. New blood in the boardroom is also something corporations are embracing more than in years past. They understand that incorporating a more diverse set of perspectives and periodically refreshing the board with new members is in the best long-term interests of the company.
To be sure, there will still be situations where settlements can’t be reached and each side takes their views directly to shareholders for a vote. In these cases, there are several important changes in how the battles are waged.
Foremost, activists and companies are employing some new techniques to reach out to shareholders, including retail investors and smaller institutions, to get them to vote. Many companies don’t realize how many shares are actually owned by employees and how active or inactive they can be in voting for directors. Employing tactics to engage with employees who own shares as well as other retail investors can make a difference during a hard-fought proxy contest.
Overall, companies and activists have had to work harder just to figure out who their shareholders are and how to reach them most effectively.
We are now in one of the most exciting and interesting times to be involved in corporate elections, whether an activist is involved or not. The trends we’ve witnessed so far this year are likely to continue and further evolve as companies, activist investors and other institutional shareholders discover different ways to communicate with each other and as the focus remains on creating shareholder value over the long-term. With over a $160 billion raised for activist strategies in 2015, a volatile market is likely to accelerate the pace of activism.
This year, prominent activist investors formed their own lobbying group in Washington to press their case that activism is good for corporate America. As activists push for changes at larger and more prominent companies, the debate about the role of activists in the markets is likely to heat up. Stay tuned.
—By Bruce H. Goldfarb, Okapi Partners LLC
Bruce Goldfarb is the founder and CEO of Okapi Partners, a proxy solicitation and specialty advisory firm that works with corporations and activist investors on elections and corporate governance issues.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.