Presentation on theme: "Three Basic Types of Activists"— Presentation transcript:
0 Dealing with Shareholder Activism 26th Annual Tulane Corporate Law InstituteMarch 27, 2014David A. Katz (moderator) Wachtell, Lipton, Rosen & KatzDaniel H. Burch MacKenzie Partners, Inc.Christopher Cernich Institutional Shareholder Services, Inc.Joele Frank Joele Frank, Wilkinson Brimmer KatcherVictor I. Lewkow Cleary Gottlieb Steen & Hamilton LLPSteve Wolosky Olshan Frome Wolosky LLP
1 Three Basic Types of Activists Governance activistsSocial issue activistsEconomic activists
2 Executive Compensation Governance ActivistsPrincipal areas of reforms include:Risk ManagementExecutive CompensationBoard StructureDirector ElectionsTakeover DefensesEvolving governance regime is derived from federal legislation, SEC rulemaking, state corporate legislation, stock exchange rules, shareholder proposals, “best-practice” standards and judicial decisions, principally those of the Delaware Court of Chancery.Economic activists often use governance as a means to an economic endRisk ManagementExecutive CompensationBoard StructureDirector ElectionsTakeover DefensesEnhanced Risk Management DisclosureBoard Responsibility for Risk Management and Risk FailuresMandatory Board-level Risk CommitteesCEO Succession Planning DisclosureSay-on-PaySay-on-Golden ParachutesCut Backs on Golden Parachutes/ Eliminate Gross-UpsClawbacksEnhanced Compensation DisclosureIndependent Compensation Committees and ConsultantsSeparate Chair/CEODirector IndependenceElimination of Classified BoardsEnhanced Board Structure DisclosureBoard Diversity Policy DisclosureDirect Shareholder Communication with Independent DirectorsMajority VotingShareholder Proxy AccessEliminate Broker Discretionary VotingEnhanced Candidate Qualifications DisclosureEliminate Shareholder Rights PlansEliminate Classified BoardsLower Threshold for Shareholder-Initiated Special MeetingsPermit Shareholders to Act by Written ConsentEliminate Supermajority Voting Provisions
3 Top 10 shareholder proposals in 2013 Source: SharkRepellent Russell 3000 data as of December 31, 2013 – compiled by Credit Suisse.(1) Includes proposals that went to a vote. Does not include pending proposals.
4 Social Issue Activists Corporate social responsibility is a major concern for companies and boards.Over 350 “environmental and social” Rule 14a-8 shareholder resolutions proposed during the 2013 proxy season, including:Political contributions and activity (115)Environmental issues (including climate change, energy, other) (80) and sustainability (36)Human rights (25)Board diversity (24)Animal welfare (15)Sexual orientation nondiscrimination/EEO reporting (13)Enhanced focus on political spending in light of the Supreme Court’s 2010 Citizens United decision (and affirmation in 2012).Petition for rule-making by academic group (including Bebchuk) on political spending disclosure under consideration by SEC.For the 2013 proxy season, ISS updated its voting policy on social and environmental proposals with a case-by-case recommendation considering whether implementation is likely to enhance and protect shareholder value and a number of enumerated factors.United Nations blueprint to promote human rights in the conduct of global business.
5 What do the typical Economic Activists want? Objective: to make the company engage in “value-maximizing” activity (but short-term demands often conflict with long-term value creation).Performance is not a defense. One-third of targets outperformed their peers in the 12 months preceding an activist attack.Size is not a defense. Since January 2011, over 75 instances of activist campaigns targeting companies with $10 billion+ in market capitalization.Economic activism often piggybacks on governance activism. Governance issues offer “levers” for activists to compel events at target companies, and governance activism has made economic activism more effective (e.g., by eroding takeover defenses).DemandsTacticsSale of company or divisionBlock transactionIncreased merger considerationNew capital structure/allocationSpecial dividendsSpin-offsManagement/board changeCompensation reformNew strategiesDivide board/managementRequest meetingsThreaten public actionIssue open letters “to the board”Behave aggressively on analyst callsThreaten withhold campaignsOppose strategic/M&A plansLaunch short-slate proxy contestOffer to buy the company
6 The current Economic Activist landscape TBU periodicallyThe current Economic Activist landscapeThe activism platformActivists are “value investors on steroids”New funds recently formed by second generation activists include Marcato, Sachem Head and SarissaPershing Square and Third Point have formed permanent capital vehiclesActivism is a mature asset class generating uncorrelated returnsFew companies are invulnerableWell “connected” Boards or insider ownership are only limited deterrents against shareholder activismActivists have targeted large cap companies with small stakes, including Microsoft, Apple, P&G and HessMainstream activismMainstream investors are increasingly working with activists behind the scenes in a symbiotic relationshipReduced stigma is associated with supporting activists publicly and privatelySupport of mainstream investors is critical in large cap activismRecent developmentsReduced stigma associated with activism is reflected in high-quality dissident Board candidatesSettlements continue to be the preferred outcome for most activists and target companiesSelected activist campaigns (LTM)(1)Source: Public filings – compiled by Credit Suisse(1) Market capitalization at time of announcement.
7 Shareholder Activism: Size/Performance are No Longer a Defense
8 Shareholder Activism: Growing Resources Heightened levels of activist activity set to continue.More capital, more campaigns.Estimated Activist Fund Assets Under Management ($ billions)
9 The number of activist campaigns has increased “Desperate” activists respond to 2008 meltdownThe birth of modern-day activismSource: SharkRepellent. – compiled by Credit SuisseNote: Data as of December 31, 2013.
10 Activist 13Ds over time13Ds filed by known activists with specific demands (2007 – 2013)Source: 13D Monitor as of December 31, 2013 – compiled by Credit SuisseNote: Includes initial 13Ds filed by known activists with specific demands as defined by 13D Monitor.
11 Proxy fight statistics post–2008(1) Proxy fight outcomesDissident electionSettled without board seats12%Total: 468 proxy fightsTotal: 160 electionsDissidents won at least one seat in ~45% of all proxy fights by either settlement or shareholder voteSource: SharkRepellent data as of December 31, 2013 – compiled by Credit Suisse.(1) Includes proxy fights from January 1, 2009 to September 30, 2013.
12 The number of proxy fights rose in 2013, following a decline after the financial crisis Proxy contests(1)(39%)17%(2)Source: SharkRepellent data as of December 31, 2013 – compiled by Credit Suisse.(1) Campaigns where formal notice of dissident proxy is publicly disclosed.(2) Seeking more than half of the Board seats.
13 Average ~46% of fights won at least 1 seat Shareholder support for dissident nominees has increased in recent yearsVote results(4)47575640223242Average ~46% of fights won at least 1 seat57%57%45%45%47%35%38%(1)(2)(3)Anecdotal evidence indicates many “vanilla” investors wonder “what’s the harm?” of seating a shareholder “watch dog” on the boardSource: SharkRepellent data as of December 31, 2013 – compiled by Credit Suisse.(1) Includes winning half of the seats sought and campaigns which were settled prior to a vote and after an ISS recommendation was issued.(2) Includes campaigns that were settled prior to a vote and after an ISS recommendation was issued.(3) Includes campaigns that were withdrawn prior to a vote and after an ISS recommendation was issued.(4) Includes 4 campaigns settled post ISS recommendation: Sandridge Energy, Ferro Corp., Hess Corp., Tessera Technologies.
14 ISS has recommended in favor of dissidents approximately 50% of the time ISS vote recommendations4757564022324250%54%42%42%35%30%26%(1)(2)In essence, obtaining ISS support is a “coin flip”Source: SharkRepellent and ISS data as of December 31, 2013 – compiled by Credit Suisse.Note: Percentages based on the total number of proxy fights where FactSet captures the ISS recommendation.(1) Includes supporting half the dissident slate.(2) Proxy fights that went to a vote with no ISS recommendation. ISS does not cover targets that are LLPs, LLCs, privately held, or have no ISS clients as investors.
15 Given the relative dissident success in contests, it’s not surprising that many targets have decided to settle“Settlement fever”41%38%32%44%47%42%37%The expense and bandwidth requirements of a full campaign are onerous for companies and activistsSource: SharkRepellent data as of December 31, 2013 – compiled by Credit Suisse.
17 Activists often make multiple demands Activist campaign menuSelected CampaignsM&A activismThe easiest activist strategy – quick capture of a takeover premium provides attractive returns over a short term using leverageCommence a process to sell the companyBreak-up companies to unlock “hidden” valueElimination of the “conglomerate discount”Focus on high ROIC “core” businessesHold up transactions for sweeteners (“bumpitrage”) or block deals (“snap-back trade”)Balance sheet activismAn easy strategy – run a simple screen to identify targetsReturn capital to shareholders (share buyback, special dividend)Record high cash on balance sheets, but subject to repatriation tax leakage“Operational” activismThe hardest and rarest strategy – requires industry experience and patienceFocus on income statement (“private equity disintermediation”)Change management, including direct attacks on CEO (“alpha by decapitation”)Rationalize cost structure (SG&A, R&D) and maximize ROICGovernance activismA means to an end, not an end in itselfReplace directors via a proxy fight or public or private pressurePush for governance “best practices”The more actionable value levers, the more attractive the target
18 Recent activist campaigns for board control (select examples) GrafTech / Milikowsky GroupDirectors Nominated: 5 (of 7) director candidates nominated by dissidentOwnership Stake: 11.2% stakeRights Plan: Expired prior to fight; not renewedCurrent Status: Ongoing; Milikowsky claims he was forced off the Board on insider trading-related charges and plans to fight for his own Board seatCliffs Natural Resources / Casablanca Capital LPDirectors Nominated: 6 (of 11) director candidates nominated and proposed CEO put forth by dissidentOwnership Stake: 5.2% stakeRights Plan: NoCurrent Status: Cliffs postponed the record date for its 2014 annual meeting; Cliffs disclosed that it offered Casablanca to appoint two directors on the Board and a third mutually agreed upon director to be named at a later date; Casablanca rejected the settlement offer and its proceeding with proxy solicitationCommonWealth REIT / Corvex / RelatedDirectors Nominated: 7 (of 7) director candidates nominated by dissidentOwnership Stake: Dissidents together have a 9.6% stakeRights Plan: 10%Current Status: Corvex / Related received written consents from 81% of shareholders to remove entire CWH Board of TrusteesHealth Management Associates / GlenviewDirectors Nominated: 8 (of 8) director candidates nominated by dissidentOwnership Stake: 15% stake in HMA and 9.6% in Community HealthPill: 15%Current Status: Glenview's consent solicitation seeking to remove all HMA directors and replace them with 8 dissident nominees was successful; HMA ultimately entered into a definitive merger agreement with Community HealthAaron’s / Vintage / StarboardDirectors Nominated: Vintage nominated 5 (of 10) director candidates nominated; Starboard later nominated 4 (of 10) director candidatesOwnership Stake: Vintage and affiliate funds owns 10.1%; Starboard position not publicPill: NoCurrent Status: PendingIntevac / Voce / Becker DrapkinDirectors Nominated: Voce nominated 3 of (7) director candidates; Following Voce’s nominations, Becker Drapkin approached the Company regarding interest in Board nominationsOwnership Stake: Voce has an 0.49% stake in Intevac, Becker Drapkin has a 4.5% stakeCurrent Status: Ongoing; Intevac agreed to add Matt Drapkin to the Board; Voce decided to move forward with nomination of three director candidates…In addition to a significant number of private situations- While settlements are generally on the rise, activists seeking control are more resistant to a settlement -- In the 11 contests where Board control was at risk, ISS supported partial dissident slates in seven contests, a full dissident slate in two contests, and management’s full slate in two contests -
19 Shareholder Activism in M&A Situations How will significant shareholders respond to the announced transaction?Does the merger agreement provide any conditions that an activist can exploit?Supermajority shareholder approval requirementsClass votesAppraisal rights conditionsThird party consents as a conditionSpecial regulatory approvalsBe wary of games played with appraisal rightsAnalyze the situation like you would with a potential interoperIs there any particular “hold-up” value?
20 What to do before the activist shows up Establish and leverage core teamManagement, lawyers, bankers, IR/PR, proxy solicitorsConduct regular update callsAssess and address vulnerabilitiesOperational / strategic weaknessesStructural defensesCorporate governance policiesKey proxy deadlinesTrack peer performanceProxy advisory firms (e.g. ISS) and activists use relative performance to make their caseKey metrics include: 1-, 3-, 5-yr stock performance, ROI, executive compensation comparisons, governance policiesConsider need to ramp up IR / PR efforts and sharpen roadshow presentationGoal is to ensure large base of supportive investors and other third partiesUse planned events (e.g. earnings) to reinforce progress against benchmarks and metricsConsider increasing frequency of momentum (“positive”) announcements – operating milestones, key hires, new guidance, etc.
21 What to do before the activist shows up (cont’d) Identify and cultivate third party supportersInstitutional investorsSell-side / industry analystsCustomers, business partnersBusiness / trade organizationsTraditional shareholder advocates (aka the “corporate governance gurus”)Refresh media relationshipsConduct interviews around planned corporate events (e.g. earnings) or other “easy wins” (e.g. project announcements)Identify spokespeople and conduct training as appropriateIndependent board representative(s) will be needed in addition to managementSimply good investor relations – blocking and tackling
22 Advance preparation is critical Stay one step aheadCore hedge fund strategy is to create a wedge between the company and its shareholders through embarrassment or suggestion of ideas that management supposedly missedLook at your business the way a short-term financial investor wouldWhat past decisions (e.g., acquisitions) is the activist likely to focus on?What value does the activist perceive; what approach does the activist propose for “unlocking” value?Analyze “capital allocation” strategies and alternatives (“excess cash” on balance sheet)Much better if done during “peacetime”Build and maintain credibility with shareholders and analysts before activists surfaceConsider the takeover landscape in your industryWho might be tempted to acquire you for operational or synergy reasons or as a result of industry dynamics?
23 Advance preparation is critical (cont’d) Be alert to early warning signs, such as:Extremely pointed questions during Q&AAnalyst reports suggesting structural changesChanges in shareholder base – stealth acquisitionsWhat has the activist done in the past?Be ready for the first phone callCompany can spend years recovering from mistake made in the first conversationEstablish internal and external teams, including advisors
24 Activist Hedge Fund “Playbook” Build StakeApply PressureSeek Control InfluenceAccumulate initial stake (may include “hidden” economic ownership amassed through derivatives)File HSRContinue to build stakeFile 13DTeam up with other institutional or activist shareholders (“wolf pack”)Request meetings with management and/or BoardSend private letters threatening public actionIssue open letters to BoardBecome aggressive with management on analyst callsThreaten “withhold the vote” campaignThreaten to agitate against Board’s preferred strategic alternatives or to vote against Board-approved M&A activitySeek to stir up third-party interest and rally other investorsDemand Board seatsLaunch short-slate proxy contestAggressive 13D disclosuresAggressive use of derivatives (“riskless voting”)Make public bear hug (rarely)Commence tender offer (rarely)
25 What can the Board expect? OppositionCompany, Board and management team go under a microscopeGreater scrutiny by investors and mediaNo strategy or statement goes unchallengedDirectors and management open to public criticismSimilar to a political campaignBattle for shareholder support / votesRhetoric can often be heatedThird party advocates neededStrategic, “rapid response” communications requiredCritical to stay on message and control the forum for deliveryNeed optimal coordination to succeedEverything you say can and will be used against you in the court of shareholder opinion
26 What can the Board expect? (cont’d) Taking the “high road” on the record is key to the public relations strategyNeed to maintain consistency of message along with rapid responseDeal with responses to dissident’s attack points – initially indirectly and at times more pointedlyBoard will be kept informed of dissident activity and proxy communicationsPress releases, media coverage, analyst reports, SEC filings, etc.Key strategic discussions to be made in close cooperation with the BoardBoard representatives should join management in attending ISS meeting and select investor meetingsScreen phone calls (office and cell)Dissidents may try to contact Board members directly, all conversations are “on the record” and any comments may be used by dissidents in their proxy materialsPreference is for all communications to be channeled through designated spokespeopleBoard meeting calendars should remain confidentialIndividual directors may be targets of attacksLike the Company, directors may be put under the microscopeResponses to be coordinated by Company and advisors
27 IR Tactics and Considerations Regular, targeted one-on-one meetingsMajor vehicle for communicating with investors and sell-side analystsNo substitute for in-person meeting with a CEO and / or executive teamControlled forum for delivering messagesLarge format or group meetings must be carefully consideredLimit group meetings (including dinners and lunches)Level of control is significantly diminishedCompany can be exposed to a “mob” mentalityEasy for opposition to cause troubleSell-side needs to be educated
28 Key documents in a proxy contest Shareholder “fight” lettersProxy cards sent by dissident and Company to shareholders multiple times, accompanied by “fight letters”First fight letter includes multiple themes; subsequent letters often single-themedCan be used as press releases or 8-K filingsConsider whether Company letters are public or private (can also use PRs to send to reporters)SEC filingsLetters, press releases, presentations, statements can all be filed as 8-K (Company), 13-D / 13-DA (dissident) or 14A (both Company and dissident)8-K filings are used to “lower the volume”PresentationsUsed in meetings with investors and proxy advisory firmsHelps educate media and other key constituencies
29 Key documents in a proxy contest (cont’d) Press releasesPrimary and fastest method to reach all audiences and directly communicate key messagesStandby statementsResponsiveAncillary communication materialsSpecial section on Company website – op-eds, letters to / from government officials, community leaders, potential third-party supporters, retirees, other constituencies, etc.
30 Typical Proxy Fight Timeline File definitive proxy materials, issue press release with 1st fight letter; Mail “stop look listen” letter45 to 40 Days38 to 32 DaysMail 2nd fight letter, issue press release31 to 24 DaysMail 3rd fight letter, issue press releaseISS meetings; Glass Lewis outreach; issue press release with 4th fight letter21 to 14 DaysIR / PR StrategyTelephone campaign (if appropriate)Final calls / visits with major investorsOne-on-ones with major stockholdersBrief reportersISS, Glass Lewis decisions: Both parties likely to issue press releases upon decisions14 to 7 DaysMail 5th fight letter, issue press release10 to 7 DaysIssue open stockholder letters as press releases, as appropriate5 to 2 DaysStockholder meetingDay 0
31 Dealing with Economic Activism Effectively Continue to focus on the businessRenew focus on investor relationsAnticipate threatsReview advance notice deadlines for shareholder proposals and nominations to strike the right “balance”Financial preparednessLegal/structural preparednessFocus on the activist’s agenda, 13D and track record and consider advantages of early engagement with the activistBe prepared to expose fight; do not allow activists to frame the public agendaLitigation is commenced infrequently – hard to sue a shareholderNegotiation may be a productive path – not all settlements public – consider the alternatives31
32 Responding to the Activist’s Approach Key judgment to make is can/will the activist pursue a takeover bid or is it simply seeking to influence policy?Establish a single point of contact and maintain a unified frontConsider advantages of engaging with the activist early – ignoring them will not make them disappearCommunicate open-mindedness and flexibilityPrepare to explain the rationale for the company’s strategy; demonstrate preparednessBe willing to listenBe willing to negotiate and/or cooperate if circumstances warrantBut do not allow activists to wrap themselves in “moral high ground” of corporate governance – expose short-term motives.Activists’ bark is often louder than their biteBe sure to consider what is ultimately at stakeAlways think about the record you are creating – how will it play in a proxy contest?
33 Fiduciary Responsibilities of a Board When Responding to Activists Board as negotiating representativeBoard cannot be passive –should be active and engagedSmith v. Van Gorkom: a shareholder vote does not absolve the BoardCannot negotiate effectively unless you have the power to walk away“Just Say No”Directors’ duty in context of a decision to sell control is to obtain the highest value reasonably available for shareholders (the Revlon rule)Takeover defenses enhance Board’s negotiating powerBoard’s responses to activists and proposals not seeking a takeover are subject to business judgment rule, with the Board able to take into account the long term interests of the corporation and its shareholdersIf an activist gains minority representation on the Board, the Board still should attempt to make decisions collectively and collegially, and act as a group – board counsel can play a critical role here
34 Influential & “independent” outsiders are often key voices in determining outcomes Institutional Shareholder Services (ISS)Leading proxy advisory firm in terms of size and influenceMore than 1,200 clients: institutions, mutual funds, corporate and public pension funds, hedge funds, college endowments and other ISS followersMany institutions strictly follow ISS recommendations when voting their sharesReviews issues separately with both sides in a proxy contest before releasing its recommendation to clientsISS report will be issued approximately days before meetingOften ISS can significantly influence 20-30% of the vote in a proxy contestRecently began opining on tender offersGlass Lewis & Co.Major competitor of ISS, now owned by Ontario Teachers’ Pension Plan BoardMany of the largest institutions, mutual funds, index and public pension funds subscribe to Glass Lewis (generally also subscribe to ISS)In 2010, Glass Lewis acquired the #3 player, Proxy GovernanceHosts a public forum called “Proxy Talk” – both sides speak to Glass Lewis clients in select proxy contests (aka public debate)Glass Lewis can influence 10% or more of the vote in a proxy contestMay make different voting recommendations in proxy contests from ISS, but still favors minority representation for dissident shareholders\Egan-Jones Proxy ServicesProvides voting recommendations on a few companiesUsually does NOT meet with either side in proxy contests, but may have conference callsISS has generally supported hostile transactions, recommended AGAINST management-supported transactions opposed by hedge funds or other shareholders, and recommended FOR hedge fund minority slates
35 Proxy Advisory Firms: Is Influence Peaking? In July 2013, SEC Commissioner Daniel Gallagher expressed concern about the influence wielded by proxy advisory firms and lamented the SEC’s role as a “significant enabler” of the tendency of institutional investment advisers to “view their responsibility to vote on proxy matters with more of a compliance mindset than a fiduciary mindset.” This was followed by an SEC roundtable.On March 19, 2014, SEC Chair Mary Jo White disclosed that the SEC will soon review recommendations for possible regulatory action targeting proxy advisory firmsSimilarly, the Canadian Securities Administrators (CSA), an umbrella organization of Canada’s provincial and territorial securities regulators, recently issued an update on their ongoing, consultative process concerning possible regulation of proxy advisory firms.The CSA expects to publish a policy-based approach for comment in the 1Q2014 that would “promote transparency and understanding” and provide guidance on recommended practices and disclosure.Yet, even as the SEC takes note of proxy advisory firms’ influence, the power of ISS and Glass Lewis seems to be waning, at least slightly.With respect to say-on-pay votes, for example, 261 companies received negative ISS recommendations in 2013, yet only 18% failed to win majority approval.Moreover, while in 2012, 100 companies reacted to negative vote recommendations from proxy advisors by filing supplemental materials, in 2013, only 59 companies did so.In addition, some major institutional investors (e.g., BlackRock) are increasingly internalizing the function of proxy analysis and vote determinations.
36 ISS proxy fight recommendations are highly consistent with shareholder vote preferences 2013 ISS vote recommendations vs. vote resultsContrary to conventional wisdom, ISS recommendations are generally in line with the shareholder consensusSource: SharkRepellent data as of December 31, 2013.Note: Includes 36 U.S. contests where ISS provided a vote recommendation for meetings since January 1, Includes contests that were settled or withdrawn.
37 The recommendation of ISS will be important in a proxy contest ISS governance proxy fight analytical framework – three key questions:Have the dissidents met their burden of proving some Board change is warranted?If so, is the dissident slate more likely to help create shareholder value?Majority contests: the dissidents should provide a detailed plan, which ISS will compare with the incumbent planISS can impact up to 30% of the vote, so navigating the ISS process, personnel and proxy fight analytical framework is key to success
38 ISS examines a wide range of factors when evaluating proxy fights ISS proxy fight factorsLong-term performance (TSR vs. market and peers)Earnings and cash flow trends (with emphasis on long-term trends)Strategic track record of the incumbents (missteps question credibility)A crucial business model inflection point (may warrant new blood)Strong Board oversight (vs. an “imperial” CEO)Board accountability (e.g., anti-takeover provisions, ignoring the will of shareholders)Corporate governance “best practices”Nominee experience, track record and independenceAbility to work constructively with incumbents (skeptical about disruption argument)Length of ownership (“owners” versus “renters”), but ISS doesn’t blame the messengerMarket reaction to dissident filingNo one factor predominates – it’s a sliding scale based on specific and unique facts
39 Dissident Director Compensation Bylaws Practice of activist hedge funds engaged in proxy contests offering special compensation schemes to dissident director nominees has increased and become even more egregious.In order to proactively address the threats posed by such schemes to the integrity of the boardroom and board decision-making processes, in 2013, 40 companies adopted bylaws that would disqualify candidates that are party to any such arrangements.In January 2014, ISS announced a new policy position that appears designed to chill efforts to protect against “golden leash” incentive schemes.In a new FAQ, ISS warned that if a board adopts “restrictive director qualification bylaws” designed to prohibit “golden leashes” without submitting them to a shareholder vote, ISS “may” recommend a withhold vote against director nominees “for material failures of governance, stewardship, risk oversight, or fiduciary responsibilities.”However, ISS noted that it has not recommended voting against directors at companies which have adopted bylaws precluding director nominees who fail to disclose third-party compensatory payments.Following the announcement by ISS of its new policy, at least 19 companies subsequently repealed their dissident director conflict bylaws and multiple others are considering doing so.
40 Does Shareholder Activism = Shareholder-Managed Governance?? Director-managed or shareholder-managed governance“The business and affairs of every corporation … shall be managed by or under the direction of a board of directors…” (Delaware General Corporation Law § 141(a))“Shareholder power to adopt governance arrangements should include the power to adopt provisions that would allow shareholders … to initiate and vote on proposals regarding specific corporate decisions. Increasing shareholder power to intervene … would improve corporate governance and enhance shareholder value” (Bebchuk).Shareholder activist objectives and impactKey shareholder activist governance objectives:Institute majority voting in director electionsDeclassify board of directorsReduce/rescind supermajority vote provisions in charter and bylawsAllow shareholders the right to call special meetingsRequire independent board chairmanGovernance activism erodes takeover defenses and board functionalityAdditionally, governance issues offer “levers” for activists to compel events at target companies