I spent the first half of this week at the NIRI annual conference in Orlando. While pulling a coherent theme together from the myriad of panels and conversations is difficult, I thought it would be worth putting some of my thoughts together both for those unable to attend and for those looking for a written record!
As you might expect, activism was not exactly given a glowing review from the investor relations community. But there was a rough consensus that activism having a galvanizing influence on companies – for instance, putting their shareholder engagement on a more strategic basis and forcing them to draw up capital allocation policies for the first time.
On the panel I spoke on, Raging Capital Management’s Ken Traub gave a couple of examples of situations in which activism ran against stereotype, including one in which his fund helped management fight off a hostile bid before going on to quadruple in value. On another, ValueAct Capital Management and Trian Partners were singled out for praise. In a week in which General Motors crushed a dual class stock proposal generally regarded as a mistaken, if not unnecessary fight, that wasn’t an obvious given. As a result, it probably speaks to how deeply activism has permeated capital markets, no longer to be sensationalized, but merely dealt with as it comes.
Elsewhere, there was much discussion of the rise of ESG – environmental, social and governance – analysis. Jeff Barbieri from Wellington Management Company described it as one of several columns used to evaluate stocks for its active managers. Elisse Walter, currently a director of the Sustainability Accounting Standards Board, said investor pressure was more important than the Securities and Exchange Commission mandating enhanced disclosure, given the differences between companies (Walter was chair of the SEC for five months in 2012 and 2013).
An interesting panel on communicating capital allocation also featured data on the correlation between return on invested capital and stock performance – stocks with rising ROIC have a 90% chance of outperforming. The alpha was substantial.
And finally, there was a discussion of the steps companies can take to extend the perspective of their shareholders, including dropping quarterly guidance (annual guidance could be updated quarterly, instead) and presenting roads not taken (which worked for McDonalds when it was under pressure to consider a REIT spinoff, but not for Macy’s earlier this month, according to a recent Wall Street Journal article).
One of the last panels of the week featured Vanguard’s Glenn Booraem, who heads up the investor’s governance program and has been involved in several efforts to establish new common governance principles. Booraem had two interesting things to say. First, that the suggested 1% threshold for shareholder proposals was “particularly onerous” but that the resubmission threshold for repeated proposals could be reformed (a possible point of compromise for Business Roundtable campaigners and the investment world). Second, that “We don't want to surprise one of our portfolio companies with a vote... [We] want to be crystal clear about our concerns so when a company responds to a vote they know what our concerns were about.”
Much of the talk on the sidelines of the event expressed surprise that Vanguard had backed Marcato Capital Management at Buffalo Wild Wings last week. I understand that Immunomedics and Citi Trends were also proxy contests where Vanguard voted on the dissident card, although it is said to have backed Arconic against Elliott Management and must have also backed General Motors.
Together, these three don’t necessarily make for a more pro-activist trend. Vanguard has backed eight or nine dissidents in each of the last three years, according to Proxy Insight – 29% of the total proxy contests in that period. That is a big increase on 2012-2013, when it backed management in 93% of contests, but still makes Vanguard one of the most pro-management large shareholders. One adviser I spoke to this week continues to place the fund in the management column at the beginning of most campaigns, but others say Vanguard is simply making decisions on their merits.
“I’ve found Vanguard’s process to be better than a number of their competitors, and the engagement process has been thoughtful and fulsome,” Bruce Goldfarb of proxy solicitor Okapi Partners told me yesterday when I asked for his views on the indexer’s voting team. Given how close-fought the Buffalo Wild situation was in particular, this might be enough to make management’s side more inclined to discount Vanguard’s support when considering whether to fight future battles.
A Vanguard spokesperson refused to comment on specific situations, but told me that “when we evaluate a proposal we're focused on maximizing the value for investors over the long term.”
Article by Activist Insight