The annual proxy season battle between shareholders and corporations appears to have reached a tipping point in favor of shareholders this year. And while some may hope that this will change public companies for the better, we may instead end up with something resembling trench warfare.
What is clear is that shareholder activism is reaching further into corporate America. The proxy advisory service Institutional Shareholder Services is projecting that there could be as many as 17 contests for the election of directors.
This is only a slight uptick from last year, but the difference is that the contests are much bigger this time around and include six at companies with a market value of more than $1 billion. Last year, the only billion-dollar company to have a contested election was the Oshkosh Corporation, which successfully thwarted an effort by the activist investor Carl C. Icahn to get directors on to the board.
Already this year, two billion-dollar companies have held contested elections: TPG-Axon Capital Management’s effort to remove the entire board at the oil and gas explorer SandRidge Energy, and the Ader Group’s effort to elect three directors at International Game Technology, a manufacturer of gambling machines. At SandRidge, a settlement with activist investors led to four nominees of the hedge fund being put on the board and an agreement for the departure of the chief executive. In the case of International Game, one independent director was elected.
These victories illustrate that activists win more often than not in board elections. So far this year, according to the data provider FactSet SharkRepellent, 66 percent of contests have been successful for the activists. This is up from 51 percent last year, though we are still early in the season.
Activists owe part of their success to I.S.S. and a rival, Glass, Lewis & Company. I.S.S. in particular is followed by many mutual funds and other institutional investors, and studies have found that it can sway up to 10 percent of the vote and much more in very public ones. And it often recommends in favor of the dissidents. Last year, it recommended in favor of the dissidents in 52 percent of campaigns. So far this year, that number is up to 73 percent. This is not completely surprising because the companies that are targets for activists are typically poor performers or in need of change.
This year, the activists are leveraging this advantage to supersize their contests. Elliott Management is taking aim at the $23 billion Hess Corporation, an energy company that Elliott contends has underperformed the market by more than 460 percent over the last 17 years while paying its management and directors $540 million.
Hess has responded the way that many other companies now do when faced with an activist: try to change. The company has replaced directors wholesale and disclosed that it is pursuing a strategy to dispose assets and become focused on exploration and production. Elliot is unimpressed and is pursuing its contest.
So not even big companies are immune to proxy activism. But as activists aim at bigger targets, they are adapting their strategies. A popular tactic in years past has been to argue for spinoffs of a company’s low-growth businesses. Now, the goals can be much more varied. David Einhorn, for example, has sought to make an issue of Apple’s enormous cash pile. Then there is the increasingly prominent opposition activism in mergers that we are seeing with Dell and its shareholder revolt led by Southeastern Asset Management.
There also campaigns to separate the job of chairman of the board from the chief executive, like the proposal at JPMorgan Chase. In all, Alliance Advisors is predicting more than 600 proposals for some type of corporate action this year, like separating the chairman and chief executive roles and changing corporate political spending.
Success is bringing new entrants. The California teachers’ pension fund has joined forces with the investment firm Relational Investors to campaign for the breakup of the Timken Company into steel and bearing businesses.
Former employees of star activists are forming their own funds. The heated battle to replace the board at Commonwealth REIT is being led by a former Icahn disciple, Keith Meister, and Corvex Management, while Mick McGuire of Marcato Capital Management, who recently won a seat on the board of the Lear Corporation, is from William A. Ackman’s Pershing Square. There is even a project affiliated with Harvard Law School to bring proposals to force boards to have annual instead of staggered elections.
The surge in shareholder activism is not all puppies and rainbows, however. There are questions about whether these changes push companies to focus on the short term or are too distracting from the real business of running these companies. And of course, there is always the question whether boards or shareholders are better situated to decide the future of the company.
Many companies are getting prepared for the activists and are ready to fight back.
They are doing so in two ways. First, companies are adopting provisions to fend off the activists. Long and convoluted notice periods are now commonplace, and many companies are adopting shareholders rights plans, or poison pills, with low thresholds, effectively limiting the number of shares an activist can acquire to 5 to 10 percent of a company.
And not surprisingly, companies are trying to regulate this type of activism out of business. The Securities and Exchange Commission is preparing to announce rules for the regulation of proxy advisers, and corporate America is lobbying to try to diminish the influence of I.S.S. through these rules. Companies and their representatives are also trying to get regulators to increase the disclosure requirements for activists.
This may be only a start. In the 1980s, when corporate America was under attack from hostile raiders, companies pushed hard to get legislatures to adopt anti-takeover measures and to validate poison pills. They succeeded. As activism becomes more commonplace, expect the companies to push back harder by looking for a way to avoid these attacks.
In other words, don’t expect corporate America to fold quietly. Instead, the battle is more likely to spread to regulators and legislators as companies take a proactive stance in anticipation of shareholder activism. But if anything, that activism is here to stay. It all means that the battle between shareholders and companies is likely to only get worse in coming years years as the barbarians at the gate become ever more bolder and innovative.
