Business

DuPont An Exception Or A Rule? How Much Does ISS Impact Proxy Battle Outcomes? [ANALYSIS]

Today DuPont dealt a stunning blow to Nelson Peltz’s Trian Fund Management in the bitter, long-running proxy battle between the two. DuPont kept Peltz and his firm from securing seats on its board by convincing a majority of shareholders to re-elect all of its current board members.

The win by DuPont also demonstrates how the influence of at least one of the nation’s most well-known and trusted proxy advisory firms may be waning.

ISS supported Peltz

Institutional Shareholders’ Services is arguably the most influential of the three biggest advisory firms, with Egan-Jones and Glass Lewis being the other two. All three of them supported Peltz in his push for change at DuPont. However, their support wasn’t enough to help Peltz win enough votes to secure seats on the chemical company’s board of directors, although in the past, it might have been.

FactSet Account Executive Anthony Garcia took a closer look at some recent proxy battles ISS weighed in on to see how much the firm’s influence is still a factor. Arguments have been made both ways. Michael Levin said on The Activist Investor Blog that 10% to 40% of total voted shares are voted with ISS’ recommendation, while other studies indicating that institutional shareholders are thinking for themselves more now.

So which is it? The short answer is, it depends.

Winner takes all… usually

According to Garcia, media coverage of activist campaigns like the one involving Nelson Peltz and DuPont play a major role in whether institutional shareholders vote with ISS or on their own. It’s no secret that the media plays up recommendations made by ISS because historically, those recommendations have often prevailed.

Garcia suggests that the use of recommendations from the influential firm “shapes the narrative” of the proxy battle and the public opinion of the company that’s involved. Thus, any media coverage of an activist campaign may have an indirect impact on how institutional investors vote their shares in a proxy fight. The big question now is just how valuable ISS’ recommendation is.

Battling for board seats

The most common proxy battle is a fight for board seats, as the one involving DuPont was. According to FactSet SharkRepellent data, there have been 1,155 proxy battles over board seats since 2011, with 62% of them occurring since 2008. The firm found that 405 campaigns went all the way, and of those 405 campaigns, nearly 60% of them publicly released the recommendation made by ISS. (All graphs in this article are courtesy FactSet.)

DuPont

ISS supported most of the board nominee slate brought by the dissident in more than 40% of the battles. In another 8% of the battles, the firm also recommended at least one of the activist’s nominees. In 25 battles that settled before going to a proxy vote, ISS supported the activist, and in aggregate, activists won 70% of the board seats in those settlements.

Does ISS support predict outcomes?

According to Garcia, the recommendations made by ISS successfully predicted the results in almost 70% of the campaigns the firm weighed in on. In fact, ISS support didn’t lose most of the battles in any year Garcia looked at.

“For all for all campaigns where the ISS recommendation was disclosed in full support of either the dissident or management slate, the difference between the outcomes of proxy fights being consistent with ISS recommendations for 2001-2007 relative to 2008-2014 was only 1.5% (69.8% to 68.3%),” wrote Garcia. “The overall percentage consistent with ISS recommendations suggests the credibility of its independent review, but the aggregate statistics do not support either the argument that ISS has too much influence nor that whatever influence it has is beginning to recede,” he concluded.

DuPont

Predictions using ISS recommendations

Interestingly, Garcia found that the “overall predictive value” of the firm’s recommendations has been consistent over time, but the predictive value in connection with which side of the proxy battle won the firm’s support has changed. He discovered that when ISS sided with the activist, the predictive value was 58%, but when the firm sided with the targeted company, management won 73% of the time.

That has changed in the last three years though. Now when ISS supports the activist, the activist won 72% of the time, while when the firm supported the company, management won 59% of the time. The shift has clearly happened gradually over the last three years. Garcia noted that during the first half of the sample since 2012, ISS support of management predicted the outcome 79% of the time, but that percentage fell to 64% in the second half.

Who is ISS supporting?

Garcia also found that when ISS’ recommendations were disclosed within the last three years, the firm was more often supporting the activist. However, in the overall sample, the firm recommended that shareholders side with the company 1.2 times more than it recommended voting with the activist.

He noted that these findings back up Marty Lipton’s observation that now it’s more important for companies to convince shareholders that changes aren’t needed than it is for activists to convince them that it is.

“However, the ISS recommendation is based on an independent review, so the new public support for activism would not be a causal factor in the shift in ISS recommendation frequency, but the shift in ISS recommendation frequency, regardless of its origins, may be causal factor in the public’s greater embrace of corporate change when the dissident has the recommendation of ISS,” noted Garcia.

DuPont

Murky numbers

He further noted that his analysis is based on cases in which ISS’ recommendations is publicly released by one of the parties, usually by the one ISS is supporting. As a result, the firm may not actually be siding with activists more now than they did in the past because activists that don’t secure the firm’s recommendation may just call off their campaign.

Data from SharkRepellent indicated that there were 275 board see proxy battles that were withdrawn, and in only four of them, ISS sided with the activist. Further, Garcia suggested that many target companies that lose the firm’s recommendation to an activist may choose to settle with the activist rather than taking the fight all the way to the proxy ballot. The data indicated that of 485 settled proxy battles, ISS’ recommendations were disclosed in just 20 of them.

Garcia concludes that at least part of ISS’ influence is probably “behind the scenes” and suggests that Lipton is right in suggesting that it’s a good idea for companies to settle with activists to prevent a shift in public sentiment toward the activist.