Proxy Voting On SBA Holdings: Long-term Activism Is Good

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The Impact Of Proxy Voting On SBA Portfolio Holdings by SBA Florida

Executive Summary

First of its kind empirical analysis of institutional investor’s proxy voting decisions involving dual board nominees and impact on portfolio value.

Study examines all proxy contests occurring between January 1, 2006 and December 31, 2014 at U.S.-domiciled companies with market capitalizations exceeding $100 million. SBA total investment across all examined companies, at time of contest announcement, equal to $1.9 billion.

Study evaluates SBA proxy voting decisions related to 107 distinct proxy contests, in which the SBA supported one or more dissident board candidates 65% of the time during the study’s time frame.

Among SBA votes to support one or more dissident nominees where the dissident won seats, the company’s subsequent 1, 3, and 5-year relative cumulative stock performance was positive, at levels of 12%, 21%, and 26%, respectively. The same returns for cases where SBA supported the dissident but management won all seats were negative, at -14%, -16%, and -15%.

SBA votes supporting management in initial contests when management subsequently won all seats were associated with a positive economic portfolio gain equal to $137 million over the study’s time frame. When SBA supported the dissidents but management won all seats, SBA experienced an aggregate loss of $259 million over the study’s time frame.

SBA votes supporting dissident nominees where the dissident won in initial contests were associated with a positive economic portfolio gain equal to $51 million in the five years after a contest is announced, over the study’s time frame from 2006 to 2014.

Study demonstrates SBA equity value linked to proxy contest holdings increased by $572 million (or $5.3 million per vote) in the five years after a contest is announced, during the study’s time frame from 2006 through 2014.

SBA Approach To Voting on Proxy Contests

As an institutional shareowner that invests funds on behalf of many of Florida’s citizens, the SBA fulfills its fiduciary duties by carefully monitoring proxy contests and by participating in them in a way that will maximize the return to its constituents: fund participants and beneficiaries.

Proxy voting is a legal term for how a shareowner submits votes on corporate matters in lieu of physically attending a company’s annual meeting. It occurs when a company’s shareowner authorizes the exercise of their voting rights. Typically, there is but one “proxy” on which to cast votes: the proxy submitted by the company‘s board at an annual or special meeting. Occasionally, however, an individual shareowner will issue a competing proxy statement, with an aim to make some additional change at the company. The most aggressive campaign would be to run an alternative slate of directors for election to the company’s board, but some matters covered by shareowner-sponsored proxy statements are mundane matters such as opposing compensation plans or presenting shareowner proposals for procedural matters at the company, often concerning voting rights of shareowners. Regardless of the content of the shareowner-sponsored proxy’s content, this is called a proxy contest or a proxy fight.

Individual and institutional shareowners may use a proxy contest as a solicitation for other owners’ support in order to challenge the composition of a company’s board of directors. When shareowners do not believe that the company’s board of directors has taken the necessary steps to maximize shareowner value, these shareowners may initiate a campaign to remove members of a company’s board of directors and try to replace these directors with their own candidates. The increase in large institutional investors as active shareowners in public corporations has brought with it a rise in the number of such proxy solicitations.

To exercise its fiduciary duties under Florida statutes, the SBA will only consider factors that affect the SBA’s investments, and it will not subordinate the interests of SBA account participants or beneficiaries to its own or other interests when voting its shares.

Of course, this is called a proxy fight for a reason; some companies, via their challenged board of directors, may vehemently resist such platforms by engaging in a costly proxy battle, and even possibly by pursuing litigation if they feel that the challenging shareowners have violated federal securities laws in their pursuit of the proxy contest. Companies may also use courts to hedge against the possibility that shareowners may agree with the dissidents since courts can enjoin dissidents from voting their shares and their proxies. Generally, corporations are free to use corporate resources to defend members of their board of directors, the corporate bylaws, and any other challenged business practice during proxy contests. Recent disclosures show that for a large market-cap company, each side can easily spend in excess of $10 million defending and marketing their proxy.

More than 99.5 percent of annual company meetings do not involve proxy contests. They instead simply feature the company’s board nominees and provide investors with the choice of supporting the elections or casting “against” or “withhold” votes (a legal distinction depending on the company’s election standards and protocol). In these cases, which are the overwhelming majority of corporate elections, the nominees are not challenged and will be elected to the board. Even directors who do not acheive support from a majority of the voting shares typically remain on the board. Proxy contests are, therefore, a unique and unusual opportunity to replace company directors.

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