The recent announcement of the formation of the Shareholder-Director Exchange, a new group that aims to facilitate direct communication between institutional shareholders (namely, mutual funds and pension programs) and non-management directors of the U.S. public companies they own, has been accompanied by a flurry of articles regarding the purposes and possibilities of this new group. From my perspective, the Shareholder-Director Exchange has tremendous potential to help improve corporate governance and performance in this country.
Today, over 70% of the shares of U.S. public companies are owned by large institutional shareholders, and for many years these shareholders have been sleeping giants with respect to corporate governance. They have often elected to “vote with their feet” (by selling shares in underperforming companies) rather than using their votes and their voices to push companies to make the often difficult changes necessary to improve performance. However, more recently some institutional investors have been taking note of, and adding their support to, various criticisms of corporations that have been raised by activist shareholders in proxy fights and precatory solicitations. Indeed, the formation of the Shareholder-Director Exchange is consistent with the observations of Mary Jo White, Chairwoman of the Securities and Exchange Commission, who recently made the following statements:
“Over the years, shareholders have become increasingly engaged with the companies in which they invest in order to influence boards and management. Much of this increased engagement can be traced to campaigns that used shareholder proposals to address corporate governance practices that were viewed as entrenching management and preventing growth, such as supermajority voting, classified boards and anti-takeover devices.”
“The nature of the practices and objectives associated with shareholder engagement is changing. More and more, investors have become comfortable with being called an ‘activist’ in part because of the support they have received for their goals and, in some cases, even the tactics that they use….[T]here is widespread acceptance of many of the policy changes that so-called ‘activists’ are seeking to effect.”
It is, of course, incumbent upon institutional shareholders to be responsible stewards of the funds they manage, and the Shareholder-Director Exchange has the potential to create an open path for these shareholders to engage in meaningful dialogue with the directors who oversee their investments. However, as highlighted by Kenneth Squire, publisher of The Activist Report, there are some troubling aspects of the 10-point protocol for engagement that was released by the Shareholder-Director Exchange. For example, I see no reason why a director should consider a shareholder’s voting history when deciding whether or not to hear that shareholder’s concerns. No shareholder should ever be penalized for exercising their inherent right to vote how they see fit.
Nevertheless, the formation of the Shareholder-Director Exchange is in and of itself a positive development if for no other reason than to stand in stark contrast to the hawkish approach that has for years been championed by firms, such as Wachtell, Lipton, Rosen & Katz LLP (“Wachtell Lipton”) and Goldman, Sachs & Co., who have made fortunes from corporate conflicts by spreading the implementation of entrenchment devices, like the poison pill and staggered board. Just recently Wachtell Lipton promoted a new entrenchment scheme whereby incumbent directors unilaterally amend a company’s bylaws to disqualify certain individuals from challenging their positions on the board – a move that was widely criticized and quickly discredited.
Despite the emergence of a sea change in support for shareholder engagement, Martin Lipton, a founding partner of Wachtell Lipton, continues to champion his most pernicious invention – the poison pill (which, in a bit of Orwellian double-speak, is named the “shareholder rights plan”). Just recently, in The Wall Street Journal, he referred to the poison pill as “an essential tool for boards fulfilling their duties in the interests of stockholders.” But the notion that the poison pill – which has been the subject of massive shareholder and academic criticism[i] – is a tool to fulfill duties to shareholders is totally misguided. The effect of the poison pill is to disproportionately shift power to management and away from shareholders, and the ongoing reduction of the trigger point for poison pills (which began at 20% and has recently been reduced to 10% and even 5% at certain companies) results in a tremendous chilling effect on shareholder involvement, as it prevents shareholders from building stakes sizable enough to justify conducting (at their own expense) the costly, time-consuming campaigns necessary to unseat and replace inept management and directors.
Another value-destroying tactic in vogue with members of the Business Roundtable and legal and financial advisors of entrenched management and boards is the allegation that shareholder activists are all “short-term” investors. According to these folks, all of the corporate world’s ills can be laid at the feet of the mythical and evil “short-term” investor, while incompetent management teams and passive shareholders who ignore the fiduciary duties they owe to their own investors are exalted and assumed to be benevolently focused on “long-term” growth and prosperity. Although this baseless attack has been exposed by commentators as a mere public-relations technique,[ii] it continues to be used to defend boards and management teams.
Let me be clear – we do not buy securities with the intention of agitating for a quick “pop” and then “flipping” them for a speedy profit.[iii] Certainly this does happen on occasion when, for example, prices rise irrationally. But in reality, the opposite is true – we focus on the long-term. The holding period for many of our investments spans several years (and sometimes even decades). For examples, just see our investments in the following companies –
|American Casino & Entertainment Properties|
|American Railcar Industries|
|American Real Estate Partners (now Icahn Enterprises)|
|Hain Celestial Group|
|National Energy Group|
|Take Two Interactive Software|