Director Strangelove: How I Learned to Stop Worrying and Prepare for Shareholder Activism
There is no debate that over the last decade shareholder activism has grown into its own animal. Rarely does an activism panel conclude these days without one of the panelists mentioning that activism has become its own asset class, which at this point is as clichéd as pointing out that no company is immune to pressure from an activist. A simple Google News search for “proxy fight” will take you down a rabbit hole from which you may never emerge. This growth in activism awareness has spawned a massive increase in various advisors, all of whom claim that they possess the key knowledge to best guide the Board and management, and yet lost in all of this is the corporate issuer’s perspective on what it all means to their unique situation.
Every advisor wants the Board and management team’s ear on how they can help with institutional shareholder engagement, often times because they have some valuable piece of “inside information” on how these institutional holders think. Many corporate issuers have lined up advisors across multiple areas of expertise for their “in case of emergency” or doomsday scenario. While I believe that it is critical to have such a plan in place, I feel many corporate issuers fail to take the proper next step, which is to understand how shareholder activism, or a proxy contest would play out at their specific company.
Taking that next step is the answer to any issuer’s most frequently asked question: How can we best prepare to deal with the threat of activism?
I believe an effective response to shareholder activism must be based on a firm understanding of four key factors:
- A complete analysis of the issuer’s shareholder profile from a voting control perspective.
- The l complexities of proxy solicitation mechanics in a contested director election versus a standard annual meeting.
- A detailed cost analysis of running a contested campaign from both company and activist perspectives.
- A regularly updated solicitation action plan that demonstrates a path to victory.
The Shareholder Profile
First, it is important to remember that your shareholder profile is ever changing. Understanding who and how many shares can be voted at any given time is the foundation for every activism defense plan. To that end, conducting regular studies of your top institutional holders and making necessary adjustments for stock loans, sub-advisory relationships, and short selling are critical. Once voting control is established, it is important to review the institutional holder component to determine the degree to which of the top holders are influenced by one of the proxy advisory firms, or whether they make voting decisions based on their own internal proxy voting policies or guidelines.
Next, it is important to establish the retail ownership profile. While this portion of a company’s shareholder profile typically votes less than a third of the time, they are most often supportive of the company when they do cast a vote. The vote from this category is never more critical than when a company finds itself in a close vote. Establishing who your top retail holders are and conditioning them to vote is an exercise that issuers should never neglect.
Once the voting control profile is created from an institutional and a retail perspective, we can then create a scorecard to track various outcomes. The Board and management team should be briefed with this type of review often, perhaps quarterly, as it is a good insurance policy against the threat of activism.The Mechanical Complexities
Most corporate issuers have a consistent year over year plan for how they complete all the necessary tasks leading up to an annual meeting of shareholders. Those tasks are often divided among several team members across the legal and IR departments. Many issuers also retain outside mail and tabulation houses to complete mailings efficiently.
This strategy works well for a standard annual meeting where the issuer conducts one mailing to shareholders and perhaps a targeted follow-up mailing prior to the meeting date. However, in a contest for board seats, it is critical for the Board and management to understand that all these decisions are now strategic ones. The approach for completing these tasks should no longer be on auto-pilot as there can be undesirable and costly repercussions for using the year over year plan.
In a proxy contest, the Board and management team should expect as many as four or five mailings to shareholders, each with another voting instruction form or proxy card and a letter to shareholders. The dissident campaign will likely produce a similar number of mailings. At the end of the contest process, your shareholders will likely receive eight to ten proxy cards between both campaigns.The Cost Analysis
If you think the cost of a standard annual meeting is high, then you might want to sit down before looking at your proxy contest bill. The last ten to fifteen years has seen many issuers changing their annual meeting approach to reduce the cost of mailing and tabulation. The rise of notice and access, moving away from elaborate annual reports and mailing packages, and the push for electronic voting have all contributed to the reduction of annual meeting costs. Most issuers can effectively stay within the expected budget for a standard annual meeting.
In a proxy contest, however, those budgets need to be drastically revised. Conducting a share range analysis of the issuer’s profile to determine the number of shareholders and shares within certain target ranges is an important evaluation. From that analysis it is possible to calculate the potential cost of the various mailings and advise the Board and management team on what to expect from a budgeting perspective. This should be done well in advance of a potential threat of shareholder activism.The Solicitation Plan
Once the Board and management team have a firm understanding of the shareholder profile, the mechanics of a proxy contest, and the cost of the contested meeting, they should focus on the strategy and necessary steps for best soliciting their shareholder base. Experience shows that preparation during peace time is the best way to lay out a solicitation plan if faced with a proxy contest.
It is important for the Board to select the best representatives to communicate with shareholders during a proxy contest. They should understand that in addition to in person meetings and conference calls with institutional shareholders, board members will also be presenting their case to proxy advisors directly. They will also be involved in the writing and reviewing of shareholder letters that accompany each mailing. The contested annual meeting demands much more of a hands-on approach from the Board and management team than a standard annual meeting.
In proxy contests, the goal is to offer up an effective solicitation plan and to execute on that plan/timeline in delivering the vote. To achieve that goal, it is necessary to use all available information on the profile to effectively target unvoted holders and to demonstrate a path to victory for the Board and management team.
Reviewing all four key elements in times of peace will provide you with a strong level of understanding for how to deal with the threat of shareholder activism. The steps involved in being prepared act as an insurance policy against having to scramble after the threat has materialized. If you go through the steps necessary and no threat emerges, then we will all be smarter for having gone through the exercise and you can breathe a sigh of relief. Again, there is no need to worry, just be prepared.
The contested nature of the solicitation also means that the Board and management team will need to spend significant time lobbying top shareholders for their support.