After his victory at Canadian Pacific Railway (CP), Ackman claimed “Directors are sitting up more straight and reading board materials more carefully and questioning the CEO more intently. That is a very, very good thing.” Who can argue with that? But will better posture, thorough reading of thousands of pages of board materials and asking more questions be enough? I argue it would pay boards to get more frequent advice from shareowners and better analysis by proxy advisors.
Boards Court Shareholders (WSJ, 8/21/2012), but are companies really going to pay a visit to every major fund that votes against its pay package? Matthew Scott, the Editor of Corporate Secretary Magazine, provides several pieces of good advice in his article, How Pershing Square has changed proxy fights, 8/19/2012.
- Engage shareholders before activists show up. Companies must make better efforts to understand their shareholders’ concerns before activists show up and use those concerns against management. ‘It is important that boards be proactive with the engagement of shareholders before the activist comes knocking so that they avoid being perceived as simply responding to an activist-initiated situation,’ says Andrew MacDougall, partner at Osler Hoskin & Harcourt. MacDougall reasons that had CP done regular comparisons of its industry operating performance and stock price performance against those of its industry peers, it may have seen the warning signs that an activist investor might take a run at the company. He says the firm should have seen its shortcomings and then reacted by ‘building relationships with the shareholder base’ in order to give reassurance and build loyalty. Instead there was very little engagement, and by the time CP reached out to investors, management seemed like strangers.
I like Scott’s advice to do regular comparisons with peers but directors need to take that information and change strategy, not just start lobbying shareowners earlier to build loyalty. Directors should ask themselves if it might be wise to open channels of communication with shareowners not just to seek support but to get important feedback on what more they could be doing. Communication should be a two-way street.
- Expect shareholders to act more like fiduciaries. As performance continues to be sluggish at some companies, more shareholders are stepping up to sound the alarm and push for change. Shareholders are indeed partners in a company, and they have responsibilities too. ‘Part of their fiduciary responsibility involves making changes on the board,’ says Lalani. ‘They will not be bystanders to bad corporate behavior any more.’
Yet, few shareowners have the resources or tenacity to engage in a full-blow proxy fight. Don’t expect that threat to arise unless there are clear signals change is needed. By then, it may be too late. Boards should encourage shareowners to voice their concerns early and often. That may increase the “noise” level and concerns will need to be sorted. However, doing so will allow boards to separate real concerns from false perceptions. Both need to be addressed.
- Speak the language of the shareholder. When an investor commits large sums of money to a stock, he or she wants to know how the company intends to grow that investment. Getting that message through to shareholders depends largely on the story you tell. Wes Hall, CEO of Kingsdale Shareholder Services, says Pershing Square spent additional money researching a plan to show other shareholders exactly how it intended to double its billion-dollar investment… Hall suggests asking yourself the question, ‘How can we make some changes that can really enhance the bottom line and add to the performance of the company over time?’ If you work with shareholders to come up with those solutions, you’ll be speaking their language.
More frequent debate with shareowners would allow companies to tell and test their story repeatedly. Getting more feedback and making adjustments will engage investors as owners. As they see some of their ideas incorporated in evolving strategic plans, the plans get better and shareowners become more loyal.
- Assemble a good team of impartial advisers. Companies need good advisers who are willing to tell them the truth. Having a core team of advisers that always agree with the board may not be in the organization’s best interest.‘The board should seek independent advice and should encourage the advisers around the table to express their independent views on the issue,’ says Hall…
A good source for impartial advice would be shareowners. We certainly have a direct incentive to monitor the companies we own and their competition. Another source of impartial advice would be proxy advisors. Unfortunately, under the current subscription model, proxy advisors have little incentive to go beyond items specified in the proxy and even those may be analyzed mostly using a check box approach.
- Know when to compromise. After buying a significant stake in CP, Pershing didn’t immediately push for a sweeping change of the board. Ackman originally asked for two board seats to guarantee that he would have input. It was only after the original request was rebuffed that his company reached out to other shareholders and campaigned for support to obtain board representation, and the Pershing director slate grew from two to seven.
Knowing when to compromise has a lot to do with knowing what your shareowners think. More routine proxy access filings would serve as an excellent gauge, as would more in-depth analysis by proxy advisors.
As Alexander Hamilton wrote in the The Federalist No. 1, October 27, 1787:
It has been frequently remarked that it seems to have been reserved to the people of this country, by their conduct and example, to decide the important question, whether societies of men are really capable or not of establishing good government from reflection and choice, or whether they are forever destined to depend for their political constitutions on accident and force.
Boards can continue to depend on “accident and force” or they can embrace governance measures that will bring more continuous feedback from shareowners in the form of proxy access and from alternative proxy advisors incentivized to provide more in-depth analysis.
Download PowerPoint presentation and read the paper (pdf) on proxy access proposals by the United States Proxy Exchange (USPX). Proposals using the USPX model guard against takeovers or even the acquisition of substantial influence by one party because each party is limited to one nominee and parties are prohibited from coordinating campaigns with each other. See Proxy Access Moves Forward: Forest Labs, Medtronic & H&R Block. The proposal at H&R Block caps the number of nominees to 48% of the board, so there can be no “change of control” via proxy access.
Another route for obtaining more in-depth analysis is the type of proposal designed by Mark Latham and recently submitted to Costco (COST). The proposal would set up a contest, pay for proxy advice out of entry fees and corporate funds, and would then share the advice of four winners with all Costco shareowners. See Costco: Proxy Advisor Contest Proposed.