Deal Professor Envisions Corporate Gadfly

Deal Professor Equates Filing Proxy Proposals with Terrorism

Deal Professor Envisions Corporate Gadfly

Starting with Corporations

Most people don’t like their behavior criticized. CEOs and boards almost always fight my proxy proposals aimed at improving corporate governance. Likewise, I wasn’t happy with the Deal Professor’s criticisms of my shareowner activism in his August 19th NYTimes article, Grappling With the Cost of Corporate Gadflies, which also criticizes John Chevedden and William Steiner. I stewed for days but finally took the advice of a good friend, who is Assistant General Counsel & Corporate Secretary at a major company,

Better to be engaged than enraged!

If I had more time available, my response would have been shorter but I have a number of projects that demand attention. When I submit proposals, I want boards to weigh them carefully on the merits. I have tried to do that with the Deal Professor’s criticism. I hope our mutual use of hyperbole doesn’t preclude further engagement. Unlike the character in the cartoon at right, I feel no need to irritate… but I do often question mechanisms in corporate governance that isolate and concentrate power, rather than distributing it. I prefer structures that distribute power, making us of the wisdom found at all levels. 

Deal Professor Argues Proxy Activists are Terrorists

Corporate America is being held hostage by three people you have probably never heard of.

That is a harsh opening line to describe, again in the Deal Professor’s words, three individuals who are simply filing “shareholder proposals at annual meetings, urging companies to change their compensation practices or improve their corporate governance.”

Wikipedia defines hostage as

Someone who is seized by a criminal abductor in order to compel another party such as a relativeemployerlaw enforcement, or government to act, or refrain from acting, in a particular way, often under threat of serious physical harm to the hostage(s) after expiration of an ultimatum.

None of us have abducted corporate America, threatened serious harm or presented ultimatums. All our proposals have been measures to be placed under a board’s advisement. Once voted on, boards learn the will of shareowners. However, boards are free to adopt proposals that win 1% of the vote or to reject those that get 99% of the vote. I hesitated with my own title for this post but it seems appropriate, given the Deal Professor’s allegation of hostage taking.

Deal Professor Says Activists Are ‘Forcing’ Companies to Spend Millions

These proposals are costing companies tens of millions of dollars and creating big fights in the courts and at the Securities and Exchange Commission… as Mr. Chevedden told me, he may make “only pennies” but the companies are forced to spend so much more…. perhaps it is time to put an end to the personal crusade of a few against corporate America.

We have initiated none of the referenced fights. While we may make “only pennies” for our activities, one could argue shareowners as a group are making millions by free-riding on our efforts. As for company expenses, when boards believe shareowners have failed to meet the requirements for filing a proposal, they can initiate a review by the SEC. The SEC charges them nothing for this service. Boards could assign such reviews and filings to a clerk who could use a simple checklist. Was the proposal submitted by the deadline? Did the shareowner include the necessary evidence of ownership? Is the subject matter one that is not prohibited by a short list of SEC requirement?

Instead, almost all companies choose to employ legal counsel to review every detail and technicality. I have never employed legal counsel to help me submit proposals and while I can’t speak for Chevedden or Steiner, I think any such action by them would be extremely rare. We are not the ones driving up costs.

It has been only recently that boards have chosen to bypass the SEC and go directly to court to stop any of our proposals from being included on their proxy. That route is considerably more expensive. The first case I remember was Apache v Chevedden. It happened a few years after Apache hired Sarah Teslik, former executive director of the Council of Institutional Investors. Maybe she was the innovator. I don’t know.

That case turned on the broker letter evidencing Chevedden’s ownership. SEC rules provide that such letters must come from a broker or bank, not an investment advisor. Chevedden’s broker was also an investment advisor and used the same stationary for both sides of the shop. Apache’s attorneys argued the letter might have come from an advisor, not a broker. The District Court for the Southern District of Texas gave the benefit of the doubt to Apache, something that would not have happened at the SEC, since their rules require the benefit of any doubt be given to shareowners. [SEC. Rule § 240.14a-8(g)]

When receiving a shareowner proposal, corporations often turn to the “Shareholder Proposals Handbook,” an excellent reference authored by former SEC attorney Broc Romanek, which soon included the following advice about going directly to court:

This typically is a more costly approach and the judge clearly will not have the benefit of the experience with Rule 14a-8 compared to the SEC Staff (which is part of the attraction perhaps).

So, the recent escalation of going directly to court is likely due to companies counting on judges not knowing the rules. I another case, a judge in the same US District Court in Texas asked me how many shares of a stock I owned. I told him it was at least $4,000, probably $6,000 or more. He than asked why I thought someone with so little invested in a company should have the right to file a proposal. I told him, that my holdings were at least two to three times the amount legally required. He then told me, “that isn’t right.” Unfortunately, our exchange didn’t appear on the court transcript.

According to the Deal Professor:

Companies spent millions dealing with these proposals. One estimate puts companies’ costs at $87,000 for each proposal, or more than $90 million a year, meaning that these three activists are costing companies tens of millions of dollars.

Why are they spending tens of millions of dollars to keep our proposals off the proxy? Our proposals generally ask to split the roles of the CEO and chair, allow shareowners to include director nominees on the proxy, require directors to stand for election every year or require they be elected by a majority vote, etc. Maybe boards are willing to spend millions of dollars to keep such proposals off the proxy because they genuinely believe such measures would weaken their ability to add long-term value. My suspicion is that many more are afraid they will lose power and they have free access to millions of dollars of “other people’s money” to retain that power.

I have never spent a dime to consult an attorney for any of my proposals, even when companies have sued me and have asked the courts to award their substantial attorney fees (that likely cost more than the value of my home).  We are very fortunate that even courts that aren’t expert with regard to SEC rules and have given the benefit of doubt to corporate plaintiffs have not chosen to award plaintiffs their costs. On the other hand, all three more recent courts that have thrown out such cases in Boston, New York and Colorado have awarded costs to us, the defendants.

I ask you, who is driving the outlandish costs of proxy proposals? Boards are spending millions on high paid attorneys to argue before the SEC and the courts. Chevedden and I have an MBA, an MPA and an MS in sociology between us; no JD. By escalating the costs associated with filing proxy proposals, Boards are “risking” other people’s money – the money of shareowners. Chevedden, Steiner and I are risking our retirement funds and our homes. I feel like a nonviolent protestor with a sign faced with dogs, water cannons and helicopters. I’m not the on driving up costs.

Deal Professor Misunderstands Our Impact

Some of these proposals may have merit, and certainly they are part of a big shift in corporate America’s governance. When I spoke with Mr. McRitchie, he told me that “we can’t put cops in every boardroom,” but he and his cohorts “hold our institutions accountable.”

That’s a misquote. I am not so arrogant as to believe the three of us do much of anything to hold corporations accountable. We simply work to give shareowners the tools to do that much more formidable job. After Les Greenberg and I petitioned the SEC for proxy access in the summer of 2002 the Council of Institutional Investors said our petition “re-energized” the “debate over shareholder access to management proxy cards to nominate directors.”  (see Equal Access – What Is It?)

That is all the three of us are doing by offering our advisory proposals; we initiate and re-energize debates. Sometimes the majority of shares are voted in favor of our proposals. Often, they are not. The business judgement rule prevents courts, in most cases, from calling a board’s judgement into question. Therefore, boards take the results of votes on proxy proposals under advisement and are legally free to do what they believe is in the best interest of their companies.  

Deal Professor Says Limit Proposals to Those Winning Immediate Support From Large Investors

These activists may be interested in the governance of companies, but it is unclear that the costs are worth it. This is particularly true when large shareholders don’t support them from the start.

When he raised that issue in his interview with me, I asked the Deal Professor to give me an example of such a proposal. He said, splitting the chair and CEO positions. I told him that such changes involve cultural traditions and take time. Many Americans place great importance on a strong executive, as can be seen by how much we pay CEOs and by how many more voters turn out for Presidential elections.

I told him I favored a system of checks and balances. CEOs shouldn’t chair the boards whose most fundamental decision is whether to hire or fire the CEO. GMI Ratings reported that 68% of S&P 500 companies had a combined chairman/CEO in 2005. That declined to 56 by 2012. Progress is slow but continues.

The Deal Professor also mixes apples and oranges. He starts by discussing our ‘failure’ at Fortune 250 companies but goes on to discuss much smaller firms like AutoNation. He fails to note, our proposals won at BRCD, COST, BCO, BMY, FOE, NEE, PPL, IRBT, DUK, CMG, AGN, BWA, ALXN, NFLX, NSR with up to 99% support. The Deal Professor also fails to count many more proposals that are excluded from the proxy because companies propose similar reforms after receiving ours. He also doesn’t count management proposals that are submitted in subsequent years because boards recognize the need after our proposals have won substantial votes.

Deal Professor Failed to Consult Large Investors

I’m not convinced by the Deal Professor’s arguments that we are holding corporations hostage and are driving up the costs of annual meetings. The owners of corporations ultimately pay those costs. Yet, the Deal Professor doesn’t appear to have interviewed any shareowners other than the three “gadflies.” If he had given his idea of a bad proposal to the Council of Institutional Investors, whose members invest over $3 trillion, they probably would have cited their preferred policy,

The board should be chaired by an independent director.

Deal Professor Appears Unaware of Vote Rigging

When our proposals “fail,” it is often because the scales of justice are tipped against us. Next time you vote online, notice that if you leave an item blank, your vote doesn’t show up as an abstention. Instead, it mysteriously converts to a vote in favor of the board’s position. See my 2009 petition to the SEC on blank votes.

Additionally, if you own your shares through a broker, you vote using a voter information form (VIF), not a proxy. Proxies must follow several SEC regulations, including that titles objectively identify each item to be voted. VIFs do not have to meet those requirements. Titles assigned to proxy proposals can be deliberately misleading. See Broken Windows & Proxy Vote Rigging – Both Invite More Serious Crime.

Deal Professor Unwittingly Generates Support for “Gadflies”

One thing I did learn from the Deal Professor is that we have a lot of supporters. A hedge fund manager emailed me the following:

the reporter did not realize that “gadfly” is a reference to Socrates.  You will recall that Socrates was put to death for asking questions that were disruptive to the powerful.  However, history has shown Socrates to be the wise one, and his accusers to have been the fools, as a corrupt Athens fell to Macedonia just two generations later.

Yes, Plato refers to Socrates as the “gadfly” of the state, since the gadfly stings the horse into action, so Socrates stung various Athenians, insofar as he irritated some people with considerations of justice and the pursuit of goodness. I like the sentiment. However, I also recall Socrates was sentenced to death for raising too many questions.

Michael R. Levin at TAI (The Activist Investor) writes, The Deal Professor’s GPA Plummets, and reminds us “his source for costs is the US Chamber of Commerce, and we know what they think of investors.” The referenced post discusses the Chamber’s move to strike down the SEC’s proxy access rule.

Petitioners assert that the SEC “failed to appreciate the intensity with which issuers would oppose nominees… [and that] directors would conclude their fiduciary duties required them to support their own nominees.”

The proposed regulations don’t mandate corporations do this. Instead, only “the issues at stake” or “fiduciary duties” prompt this expenditure. At their discretion, management and boards spend all that money on proxy contests. Of course, they don’t spend their own money, either, but rather use company money, which really belongs to investors.

And why do they do this? What issues are at stake, or what fiduciary duty do they seek to protect? Of course, they only want to defend their turf and entrench themselves. So, the SEC proxy access rules won’t require corporations to do this. Corporations choose to.

Just as the Chamber of Commerce invented a fiduciary duty compelling corporations to spend their treasuries to defend their own board candidate against challengers, too many boards have invented even more absurd reasons to spend enormous sums, simply to keep advisory proposals off their proxies.

The Deal Professor’s Own Readers Reject His Arguments

When I last looked, 42 readers had responded to Grappling With the Cost of Corporate Gadflies. I read most, if not all, and found none that favored the Deal Professors arguments. One feature I really like at the NYTimes is their practice of calling out their favorite responses and letting readers do the same. For the Deal Professor’s article, the NYTimes called out only one favorite:

If companies don’t want to deal with gadfly stockholders, I have a simple solution, go private.

Now lets look at the favorite comments of readers, which are nicely put in order by reader preference. I’ll reprint the top seven, excluding my own:

#1

I generally respect Mr. Solomon’s columns but his conclusions here are incorrect.

You can’t have any discussion about cost without putting it in perspective. Let’s assume that all of Mr. Chevedden’s 32 proposals were targeted at a single company, say AutoNation. (They weren’t all targeted at one company btw.) Let’s also assume that the $87,000 cost per proposal is correct and, more importantly, is truly variable – that is it doesn’t represent an allocation of fixed costs (like a salaried employee’s time) that wouldn’t change with fewer proposals. (The majority of these costs are almost certainly allocations of fixed expenses.)

So, in our hypothetical example, Mr. Chevedden ‘cost’ AutoNation $2.8 million or less than half what AutoNation pays Mike Jackson, its CEO. In fact, Mr. Chevedden’s proposals would have only just snuck into the five highest paid officers in 2013 according to AutoNation’s SEC filings.

For those of us who are concerned about corporate governance (or lack thereof) proposals of these type serve to keep legitimate issues and the forefront and to remind shareholders that they do not have to be passive passengers.

For me, their cost is pretty minimal compared to their benefit. And the fact that they annoy and irritate senior management is a just a bonus.

#2 is my comment, so I’ll move to #3

Unfortunately the Proxy Monitor report on which the Deal blog is largely based on a biased and often untrue account of shareholder proposals. The Manhattan Institute which wrote this Proxy Monitor article is a far right wing think tank which is funded by corporate interests who of course want to preserve their power and keep shareholders from getting more rights.

Over the past 15 years the efforts of so-called gadflies has led to the elimination of director retirement plans, the almost complete elimination of staggered boards, poison pills, excessive single trigger golden parachutes and tax gross up provisions for executive pay. Because of shareholder proposals almost all companies now have a policy to elect directors by majority rather than by plurality vote.

It is a lie to say there are excessive costs to shareholders. Instead, it is an unambiguous positive for the shareholders who do not submit shareholder proposals. They are free riders benefiting from the great changes that occur in company governance, the enhancement of democratic rights and the elimination of entrenchment devices previously in place for directors and executives. Indeed many companies now acknowledge that these things that they originally fought, and have now implemented, do make sense. Any attempt to restrict shareholder rights would be a terrible blow for corporate responsibility, democracy and accountability. It defies history and common sense. Shame on Proxy Monitor for arguing otherwise.

#4 is much like the paper’s favorite

I’ll help sponsor these “gadflies”. They’re doing the work society should be doing by ensuring corporations can’t take total control of our country. Even if a majority of proposals aren’t passed, these activists keep companies on their toes. If the companies want to operate in more secrecy, take them private.

#5

Mr. Solomon seems to believe that the standard of success for shareholder proposals is whether they receive over 50% support. In fact, most shareholder proposals are filed by long term institutional shareholders, and these investors use shareholder proposals to jumpstart discussions with companies about their corporate governance and accountability to shareholders. A growing of body of research links engagement between shareholders and management with improved long term returns for investors..

Mr. Solomon may also not be aware that both the Manhattan Institute and the Chamber of Commerce are funded by corporate management, who understandably would rather not cede control of these discussions to shareholders.

#6

Gadfly eh? A term used at the outset to categorically disparage these folks who virtually single handed, stand up for the little folk. Ok, their individual motives ate complex at best. But their function is priceless. The author smirks and sneers disgustingly. Oh the costs, the costs, the horrors.

Nowhere does he attempt to estimate the costs that corporate management creeps inflict on the shareholders or on society at large. A ten minute search of the costs of their frauds would astound.

John Kenneth Galbraith, early in the 70’s I recall wrote a book called “The New Industrial State.” In it he described precisely what has come to pass. Corporations that are managed for the managers’ benefit, not the stockholders.

He described the transformations that gave shareholders only 1 option if they were dissatisfied with management–sell the stock.

He also described the interlocking of corporate boards whereby ‘you scratch my back, I’ll scratch yours’ allowed compensation committees to ensure outrageous salaries and retirement packages.

And of course, Galbreath predicted all the consequences of such unassailable governance we see today. Corporate Misdeeds–hah–that redound and rebound into every aspect of our society. Not least, the sociopathology of an astounding mal-distribution of wealth. Left unaddressed, our democracy cannot survive.

The author is the worst kind of hack–a term referring to a carriage one hires to carry you wherever you wish.

Vive le Gadflies

#7

One way to save money on these proposals would be to fight fewer of them. In any case, “charging” the time of staff lawyers who would be receiving their salaries with or without a proposal, is a fictional “cost”. Issues like splitting the roles of Chairman and CEO are hardly nutcake-fringe topics. Shouldn’t they be brought up?

The fact that few individual shareholders bother to read and vote on proposals is not the fault of the proposers. Should we simply reappoint incumbent Congressmen, since they tend to win anyway? We need Gadflies. And the CEOs who believe what the Compensation Committee of the Board said about their talents, need to hear other opinions.

Most used much the same tone, were very thoughtful, and deserve wide circulation.

Deal Professor Wakes Up Retail Investors

Given the feedback I have gotten and the comments of NYTimes readers, I am now convinced the Deal Professor has provided many with an education. Readers became both enraged and engaged. I assume most are retail shareowners. While we own about one third of the market, most retail shareowners don’t bother to vote. Maybe the Deal Professor’s article will wake us up to the need to vote. I offer advice on how to do that intelligently and quickly, as does ProxyDemocracy.org. If we are lucky, maybe the Deal Professor’s article will even prompt a few others to engage more fully. I stand ready to help in filing proposals in the long-term interest of shareowners.

Is Corporate America being held hostage by these 2014 shareholder proposals?

You decide. This list does not include proposals that were submitted by boards to counter and disqualify our proposals.

Brocade Communications Systems, Inc. (BRCD)
Special Shareowner Meetings
60% support

Costco Wholesale Corporation (COST)
Simple Majority Vote
65% support

Brink’s Company (BCO)
Elect Each Director Annually
78% support

Bristol-Myers Squibb Co (BMY)
Simple Majority Vote
85% support

Ferro Corporation (FOE)
Simple Majority Vote
99% support

NextEra Energy Inc (NEE)
Simple Majority Vote
73% support

PPL Corporation (PPL)
Special Shareowner Meetings
59% support

iRobot Corporation (IRBT)
Simple Majority Vote
82% support

Duke Energy Corp (DUK)
Special Shareowner Meetings
60%

Chipotle Mexican Grill, Inc. (CMG)
Simple Majority Vote
75% support

Allergan, Inc. (AGN)
Independent Board Chairman
51% support

BorgWarner Inc. (BWA)
Simple Majority Vote
79% support

Alexion Pharmaceuticals, Inc. (ALXN)
Right to Vote Regarding Poison Pills
91% support

Netflix, Inc. (NFLX)
Right to Vote Regarding Poison Pills
80% support

Neustar Inc (NSR)
Elect Each Director Annually
86% support

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3 Responses to Deal Professor Equates Filing Proxy Proposals with Terrorism

  1. James McRitchie August 22, 2014 at 10:05 am #

    Readers might also be interested in Broc Romanek’s more succinct post on the NYTimes article at http://www.thecorporatecounsel.net/blog/2014/08/shareholder-proposals-10-things-about-ny-times-gadflies-column.html

  2. James McRitchie August 23, 2014 at 1:57 pm #

    Additional views at Big business takes aim at corporate activists http://www.latimes.com/business/hiltzik/la-fi-hiltzik-20140824-column.html#page=1 and
    10 Things I Think about Broc Romanek’s 10 Thoughts about Steven Davidoff Solomon’s Gadflies Column http://www.professorbainbridge.com/professorbainbridgecom/2014/08/10-things-i-think-about-broc-romaneks-10-thoughts-about-steven-davidoff-solomons-gadglies-column.html

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