McRitchie: How about giving our readers a little personal background?
Daniel Rudewicz: During the day, I am the managing member at Furlong Financial, LLC. In the evenings, I am a law school student. I have lived all over the US, but right now I live, work, and study in Washington, DC. I am also a CFA charterholder.
McRitchie: What got you interested in corporate governance and proxy access?
Daniel Rudewicz: I have found that good corporate governance, including offering proxy access, can lead to less distortion in valuation methods. There are many methods to valuing a company, but in a DCF valuation or NCAV valuation one of the biggest complaints is that there’s no way to make sure the value of those cash flows (or assets to be turned into cash flows) will ever be returned to shareholders. The argument many investors make is that if a company chooses to retain what it has earned, the situation will lead to less than optimal capital decisions by managements. (One example of a less than optimal capital decision is spending money on what Peter Lynch calls Diworseifications.) The truth is that the company belongs to shareholders and not to the management. I do believe that many (not all) boards know this and try to act in the shareholders’ best interest.
That’s why good corporate governance practices are so vital to letting the company realize its true value. Bad corporate governance practices can lead to entrenchment and waste. As I learned this, I became more and more interested in the role shareholders can have in shaping the company’s corporate governance. I feel that proxy access is just an example of one of the many tools that companies could offer their shareholders.
In regards to proxy access, the most important advantage of companies offering access to the proxy card is that it can lead to lower liquidity risk for large shareholders. Large shareholders are at a disadvantage to smaller shareholders when it comes time to sell. The larger shareholder will have to either wait much longer to exit the position or will be forced to take a huge discount if he or she wishes to sell quickly. This is a problem.
Because of the illiquidity discount that increases with size of their ownership, small shareholders may be discouraged from buying more shares of a certain company. I believe a company should be encouraging their small shareholders to buy more. Proxy access can mitigate the liquidity risk. Being in a position to be able to place your nominee on the company’s proxy card is a very valuable position. A company offering proxy access to shareholders will allow those who own amounts above the threshold to be able to shop their large positions much more effectively, because now those positions are more valuable.
A company with good corporate governance (such as offering proxy access) will offer comfort to shareholders (and potential shareholders) that there are many avenues for shareholders to take if the board begins taking actions contrary to a majority of shareholders’ wishes. This will lead to more confidence in a DCF or NCAV valuation; thus, a higher overall company valuation.
McRitchie: Why did you choose these specific companies for proxy access proposals?
Daniel Rudewicz: Largely for the reasons discussed above. These companies are clearly worth more than the current market values them at. Most of my other positions will appreciate in price and converge on their true worth in a short period or time, often less than the window of time needed for me to even submit a proposal. Once my price is met, I will sell and reallocate the capital to other undervalued opportunities. However, other positions will linger well below their true worth. Like many of the companies I invest in, these companies tend to be the smaller companies with lower liquidity. I feel that having proxy access would reduce the fears a smaller shareholder might have about buying more of the company and then having an illiquid position. I think a company should want its existing shareholders to buy more, and proxy access accomplishes this.
McRitchie: What are the provisions of your proposals?
Daniel Rudewicz: They vary from company to company. I’m relatively new to the 14a-8 shareholder proposal world, so I try to take clues from the leaders in the area. The levels in my earliest proxy access proposals reflect this. However, I don’t understand the reasoning behind making a 3% (or other level) shareholder wait two or more years before gaining access to the proxy. Why wait? If a company is being run into the ground, what’s wrong with giving shareholders a voice on the proxy card earlier? I think one year should be the maximum.
The two proposals I have submitted (as of December 16th) were to Paragon Technologies, Inc. and KSW, Inc. Both were binding bylaw proposals. I submitted the Paragon proposal back in September. The proposal sought to grant proxy access to those shareholders owning 3% for more than two years. Because Paragon is no longer subject to SEC rules, the proposal process was a bit different.
Even though the proposed bylaw was not adopted at the company’s annual meeting held on Dec 14th, the language of the binding bylaw proposal was eligible to be included on the proxy. Knowing that the binding bylaw language held up, I submitted a similar proposal to KSW, Inc. This proposal seeks to grant proxy access to those shareholders owning 2% for more than one year. Also, KSW does have supermajority provisions attached to amending certain bylaws, so I made sure to structure the proposal so that it is an addition. Thus, it will only require a simple majority.
McRitchie: Good luck with KSW, Inc. Since their meeting isn’t until early May, I hope you will give us another opportunity to help you make the case for proxy access as voting gets closer.
So, there we have it. Two more proposals brings the total up to seventeen by my count. One down, that many of us didn’t even know about, and sixteen more to go. I’m also delighted to note that Rudewicz has joined the USPX. For previously filed proxy access proposals, see 15th Proxy Access Proposal of Season Filed at Nabors.