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Forum Report:
Fair Investor Access
Conclusions of Program for Fair Investor Access, Responding to
Activism
Investing in enterprise value
Current conditions supporting professional activism
Confusion about responsibilities
The Forum’s program for “Fair Investor Access” was initiated to
provide marketplace tests of “best practices” to be defined by a
coordinated Conference Board Task Force on Corporate/Investor
Engagement,[1] and these efforts have
naturally become focused on issues raised by the recent growth of
professional “activist” funds.
The concluding observations of Forum participants are summarized
below. It should be noted that we devoted considerable attention to
such issues as activist encouragement of short term trading price
benefits at the expense of long term enterprise value, but that this
report is focused on the Forum’s purpose to identify and support the very
practical opportunities that activism creates for
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long term investors to realize the intrinsic value of companies, |
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corporate managers to demonstrate responsible leadership,
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policy makers to clarify fiduciary responsibilities concerning
corporate capital. |
In concluding this program, I want to thank The Conference Board staff
and all of the Forum participants who have asked questions and offered
comments – especially the Forum’s
Program Panel
members who volunteered a few months of guidance when we started in
2012.
Investing in enterprise value
In the context of our interest in long term enterprise value, the
current wave of activist proposals can be viewed essentially as a
disruptive process that transfers business assets from weak to strong
managers. Proposals for stock buybacks, for example, may raise
questions about using corporate capital to placate activists in a new
variation of greenmail,[2] but as a
practical matter any board that accommodates these demands has
effectively admitted that its responsibility for assets should be
transferred – and has served both short term and long term investors
by doing so.
Like any other disruptive process, activism will create opportunities
for investors. These are some of the opportunities we have observed,
and we should be alert for more:
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Realizing long term intrinsic value in buyouts
– When activist pressure to promote short term stock price
stimulates a buyout, public shareholders can now use independently
administered appraisal rights to realize the same intrinsic value
of a company that private equity investors are getting at a
“forced sale” bargain price.[3] |
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Improving management
– Contests for control will present opportunities for investors to
support enlightened board candidates – either incumbent or
dissident – who advocate alignment of executive compensation with
enterprise performance instead of stock price.[4] |
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Demonstrating leadership
– Investors will be able to identify corporate managers who
address activist challenges with responsible leadership[5]
instead of hiding behind professional defense playbooks.[6] |
Long term investors can exploit these and other opportunities to
generate competitively differentiated returns. Those of you concerned
with policy – including economists as well as fund managers – can also
make use of these opportunities to demonstrate the financial benefits
of sound investment and capital allocation principles.
Current conditions supporting professional activism
To respond effectively to the current form of “agency activism,”[7]
it is important to consider how it may be shaped by market conditions
that differ from those of past raiding cycles. We can of course expect
a similar pattern of expansion and gradual decline as suitable targets
are eliminated, but these new conditions may significantly expand both
the criteria for target suitability and the number of activists, and
thus require more careful investor consideration of an activist’s
issues.
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Short term values:
Whatever philosophy they offer, professional activists are fund
managers who make money from quarterly measurements of stock
prices, directly as a basis for fees and indirectly as a
performance measurement in marketing a fund. These fee and
performance measurements are not changed by the period of time a
fund manager expects to hold a stock in the portfolio. We must
recognize that competition for “success” as an activist will
inevitably be based on generating short term increases in stock
prices. |
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Selection of targets:
Considering their need for short term performance measurement and
advertising, activists must select targets that present
opportunities for the activist to be credited for “unlocking
value.” Screening has generally been based on observations of
disappointing stock price trends or unpopular governance practices
that provide a foundation for attracting broad shareholder support
of an activist’s corrective proposal. It has become common
practice to test candidates quietly for defense playbooks that
promise either appeasement or noisy escalation, and with the great
increase in activist funds this testing is often done by the
smaller entrants who can gain recognition by attracting more
established allies. There are also indications that some activists
are following the practices of 1980s raiders by targeting
companies that engage professionals whose defense playbooks can be
expected to discourage investor support of their client. |
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Influence of corporate defense advisors:
The process of activist “engagement” presents significant
opportunities for professional advisors specializing in corporate
management defense, not only for fees relating directly to the
response process but also for transactions and corporate actions
that the advisors will be in a position to recommend.[8]
This market opportunity has been addressed very successfully by a
few legal, financial, and public relations advisors that present
similar views of the need for boards to be guided by a specialized
“team” of experts experienced in the application of a recognized
playbook,[9] even though the playbook
consistently rewards the attacking activists with escalating rounds of
credibility enhancement and ultimate victory.[10] |
Confusion about responsibilities
An important observation for policy-makers is that both activist
proposals and management responses have often appeared to be
inconsistent with previously accepted principles of corporate
responsibility. Confusion about these fundamental responsibilities of
both corporate and fund fiduciaries should be resolved to provide a
sound foundation for considering activist proposals, as well as for
any other corporate capital allocation decisions:
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Corporate purpose
– In what is now a familiar issue to Forum participants,
distinctions must be made between short term interests in the
market prices of securities and long term interests in the
enterprise value of a corporation. Both short term and long term
investors deserve equal respect, of course, but the integrity of
corporate capital upon which both rely requires uncompromising
management of the corporate interest. This principle has been
challenged by recent practices that use corporate capital or
concessions of other corporate resources to accommodate short term
interests of activists. |
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Fiduciary judgment
– Questions have been raised about both investors and corporate
managers relying upon advisors to make decisions that should be
based on the judgment of fiduciaries. Concerns about fund managers
using proxy advisors or standardized policies are of course not
new. But now many corporate directors also appear to be adopting
professionally developed defense playbooks as responses to
activists rather than making their own judgments about corporate
interests. |
Your continuing questions and comments, as well as your suggestions of
Forum support, will of course be welcomed.
GL – January 5, 2015
Gary Lutin
Chairman, The Shareholder Forum
575 Madison Avenue, New York, New York 10022
Tel: 212-605-0335
Email:
gl@shareholderforum.com
Program Panel:
Barbara Blackford,
Senior Advisor to the Governance Center and Reporter of the Task Force
on Corporate/Investor Engagement, The Conference Board
Heather Brilliant,
until 2014 Vice President and Global Director of Equity & Credit
Research and currently CEO of Morningstar Australasia, Morningstar,
Inc.; Director and Past Chairman, CFA Society of Chicago; Board
Member, CFA Institute
*Margaret M. Foran, Chief Governance Officer, Vice President
and Corporate Secretary, Prudential Financial, Inc.; Director,
Occidental Petroleum Corporation; Member of the Business Council,
American Bar Association; Trustee, SEC Historical Society; Member of
Policy Review Board, The Shareholder Forum; Member of The Conference
Board Task Force on Corporate/Investor Engagement
*James Kristie, Editor and Associate Publisher, Directors &
Boards
Jeffrey D. Morgan,
until 2014 President and CEO, National Investor Relations Institute (NIRI),
and Member of the Individual Investor Advisory Committee, NYSE
*David A. Silverman, Managing Director, Blue Harbour Group;
until 2014, Chair of the Corporate Governance Committee, New York
Society of Security Analysts (NYSSA)
*Timothy Smith, Senior Vice President, Walden Asset Management,
Boston Trust & Investment Management Company; Member of the
Sustainability Advisory Board, Kimberly-Clark; Chair, Public Policy
Committee of US SIF (f/k/a Social Investment Forum)
*
Members of the Forum’s
2010 Program Panel
for Electronic Participation in Shareholder Meetings (“E-Meetings”)
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