The Shareholder Forum

supporting investor interests in long term enterprise value

 

Purpose & History of Services

The Shareholder Forum

The Shareholder Forum supports investor interests in corporate enterprise value with services that require independence – and that may benefit from the Forum’s network resources and recognition for advocacy of long term investor interests – to assure a definition of relevant issues and fair access to information that can be relied upon by both corporate and investor decision-makers.

The policies that provide a foundation for the Forum’s marketplace functions have been carefully developed and tested to allow any investor to participate in its communications, either anonymously or visibly, without acting in concert. Established originally to accommodate professional fund managers, this independent moderator function has proved to be consistently effective in managing orderly processes of issue definition for rational analysis by fiduciaries who are responsible for informed decisions.

Initiated in 1999 by the New York Society of Security Analysts with lead investor and former corporate investment banker Gary Lutin as guest chairman to address the professional interests of its members, and independently supported by Mr. Lutin since 2001, Forum programs have achieved wide recognition for their effective definition of important issues and orderly exchange of the information and views needed to resolve them. The Forum's ability to convene all key decision-making constituencies and influence leaders has been applied to subjects ranging from corporate control contests to the establishment of consensus marketplace standards for fair disclosure, and has been relied upon by virtually every major U.S. fund manager and the many other investors who have participated in programs that addressed their interests.

Currently important applications of the Forum’s independent position include the support of corporate managers who wish to provide the leadership expected of them by responding to activist challenges with orderly reviews of issues relevant to long term investor interests.

Requests for Shareholder Forum consideration of support may be initiated confidentially by any investor or by the subject company, or by the professional advisors to either.

 

For the report on which the article below is based, see

 

New York Times, May 24, 2009 column

 

May 24, 2009

Fair Game

Elect a Dissident, and You May Win a Prize

AFTER decades of being shut out of the director election process by the Securities and Exchange Commission, shareholders scored a big win last week. The agency is considering making it easier for investors to nominate alternative directors to corporate boards.

The proposal’s terms vary, based on company size, but investors who abide by a set of relatively simple rules could place director nominees on corporate proxies and put them to a shareholder vote.

Those interested in nominating directors at a large company, for example, must own a total of at least 1 percent of its shares and must have held that stake for more than a year. They must also be willing to certify that they are not trying to take over the company or gain more than a minority representation on the board.

Once these and several other requirements are met, shareholders could nominate directors to fill up to 25 percent of a board’s seats.

“The nation and the markets have recently experienced, and remain in the midst of, one of the most serious economic crises of the past century,” said Mary L. Schapiro, the chairwoman of the commission, when she announced the proposal. “This crisis has led many to raise serious questions and concerns about the accountability and responsiveness of some companies and boards of directors, to the interests of shareholders.”

If the rules go into effect, they will be a force for major change. In the past, only those shareholders with millions to spend on hard-fought proxy wars could hope to influence a board’s makeup.

For the next two months, the agency is seeking public comments on the proposal. Get ready to hear squawks and howls from those who think that shareholders should let wiser heads — like those on board nominating committees — decide who is fit to be a corporate director.

Naysayers will no doubt predict that the world will end and that stocks will fall if dissident slates of directors muscle their way into the boardrooms.

But a new study of 120 so-called hybrid boards — those formed when activist shareholders won one or more director seats from 2005 through 2008 — tells a different story. On average, these companies’ shares outperformed their peers in both short- and longer-term periods.

From the beginning of the contest period for a board seat through the first year of a hybrid board’s existence, companies’ total returns were 19.1 percent, or 16.6 percentage points better than peers’. And total share price performance through the three-year anniversary of the hybrid boards averaged 21.5 percent, almost 18 percentage points more than their peers.

To be sure, much of the excess return occurs shortly after an activist announces his or her intention to battle for board seats at a company. Investors, taking their cue that the company may be undervalued, typically bid up its shares in the three months leading up to the formation of a hybrid board. Keep in mind, too, that averages mask both exceptional and disastrous outcomes.

But the study, conducted by the Investor Responsibility Research Center Institute, a nonprofit organization, and Proxy Governance, a proxy advisory firm, certainly shows that directors put in place by dissident shareholders do not generally wreak havoc at these companies. In almost 90 percent of the cases, hedge funds were the driving force behind the hybrid boards.

The degree of outperformance registered at these companies varied in surprising ways. One element that seems to affect results was the size of the stake held by the dissident shareholder. The greater the stake, the bigger the gains.

At companies at which dissidents held 5 to 10 percent of shares, for instance, results over the following 15 months moderately exceeded those of their peer groups. But for companies in which the dissidents owned 10 percent to one-quarter of the stock, price appreciation significantly outshone peers, averaging almost 68 percentage points higher over the ensuing 15 months.

Performance at the companies where dissidents held less than 5 percent of shares was only in line with peers, on average.

Here is another interesting data point from the study: A company’s share performance varied based on the number of director seats that a dissident holder won. Less is more, as it turns out. Compared with their peers, boards that seated a sole dissident moderately outperformed but those companies with three new directors significantly underperformed.

In addition to allaying fears about the impact that dissident directors may have on a company’s prospects, the study provides context on the issue of proxy access to shareholders and how broad it should be. That is the view of Jon Lukomnik, director of the I.R.R.C. Institute.

“I think what it says is there is some value to owners being able to challenge existing management and that there are also some limits to that value,” Mr. Lukomnik said. “Dissidents can clearly get the market to focus on the hidden value in these companies, but delivering on it takes hard work.”

Scott A. Fenn, managing director of policy at Proxy Governance, said the study’s findings should also help dispel the myth that those who try to shake up boards are interested only in short-term profits. “On average, anyway, when hedge funds get on boards,” he said, “at least they have a decent track record of creating some value.”

 

A version of this article appeared in print on May 24, 2009, on page BU1 of the New York edition.

 

Copyright 2009 The New York Times Company

 

 

 

 

 

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Publicly open programs of the Shareholder Forum are conducted for free participation of all shareholders of a subject company and any fiduciaries or professionals concerned with their decisions, according to the Forum’s stated "Conditions of Participation." In all cases, each participant is expected to make independent use of information obtained through the Forum, and participation is considered private unless the party specifically authorizes identification.

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