Developments in the few activist campaigns to have picked up since the end of 2020 proxy season suggest the rhythm of these campaigns will not be much different from those that pre-dated COVID-19.
This week, New Mountain Vantage Advisers made an expansive-looking books and records request at Virtusa. The activist, which launched a proxy contest in June for three board seats, is looking not just for the shareholder register but documents that could uncover information on whether the IT services company’s CEO and chairman, Kris Canekeratne, is exerting "undue influence" over the corporation and its strategic direction. In short, it is looking for dirt that could embarrass the company in its defense.
Campaigns During The 2020 Proxy Season
This is a tactic that was building some momentum going into proxy season – in fact, it was the last cover story in Activist Insight Monthly before the coronavirus arrived in March – but was swiftly removed from the activist arsenal. During the 2020 proxy season, activists mostly waged campaigns at companies they knew well – including from inside the boardroom – so the tactic would have had limited impact. Larger, more sophisticated companies with settled shareholder bases and good engagement practices may also be able to rebut the inference of shiftiness more easily.
Now it appears to be back and, although the demands themselves are rarely satisfied directly, they can have ulterior motives. While courts have often sided with management to deny shareholders access to extraneous information or allowed companies to silence investors with non-disclosure agreements, a books and records demand allows an activist to put management on the defensive by implying it has something to hide.
Elsewhere, Crown Castle International signaled that five of its directors would stand down over the next two years after it tightened its retirement policy, positioning it for a board refreshment before Elliott Management has a chance to nominate directors (for more on the campaign, Elliott’s website is here, while my colleague Iuri Struta explained what the activist is after in his subscriber-only newsletter, The weekly wrap).
Land & Buildings subsequently disclosed its own position in the stock and lambasted management, saying the company’s announcement was a "[c]lassic entrenchment maneuver to buy time," and that "long-term persistent underperformance like CCI’s is typically a function of leadership, and the company handpicking a new board will likely leave shareholders with the same disappointing returns." The company, for its part, says it will work with a search firm to identify new directors and also plans to tighten its compensation.
We will likely see much more of this in the months to come, at least at activist targets. Back in June, we noted that 2020 had seen a dramatic decline in director appointments at Russell 3000 companies, while departures had stayed steady. But the article also noted that board refreshment was heading for a cyclical pause. Whether that increases the vulnerability of companies that don’t refresh in the years to come depends on whether demand for more diverse boards continues to grow, and on how quickly activists themselves come back from their summer holidays.
Voting Against S&P 500 Company Directors
Proxy Monthly, our sister publication, came out yesterday with an interesting article looking at reasons given by investors for voting against S&P 500 company directors. More than one-half of rationales mention independence, often with specific reference to committee membership rather than board independence in general. Around 20% of rationales mentioned diversity or compensation, high enough to cause boards some concern. However, despite rising support for shareholder proposals on diversity themes, a sign of how far racial concerns lag behind gender in the minds of shareholders is buried in the rationales. Gendered keywords appeared in over 10% of rationales, versus racial keywords, which were found in just 1.6%.
Quote Of The Week
Quote of the week comes from Bill Ackman, who has drawn credit for hiring minority, women, and veteran-owned firms to help underwrite the initial public offering of his special purpose acquisition company, Pershing Square Tontine Holdings. After telling Yahoo Finance that co-managers are often given too small a piece of the action and that Tontine would not have been "nearly as successful" without the diverse actors he hired, Ackman explained why the move worked out:
"There was very little overlap, interestingly, between the introductions that were made by the big banks versus the smaller firms, and so it was a win-win for everyone," Ackman said.