The reform of proxy voting adviser regulations by the Securities and Exchange Commission (SEC) may have failed to meet the highest hopes or worst fears of those interested in their implementation, but changes to the submissions requirements for shareholder proposals have proved every bit as radical as promised.
Q2 2020 hedge fund letters, conferences and more
The Tiered Submission Threshold
On Wednesday, America’s financial market regulator voted along party lines to introduce a tiered submission threshold ranging from a minimum $2,000 market value for investors who have held the stock for at least three years, to $25,000 for those who have held the stock for one year. It was not immediately clear from speaking with shareholder proponents exactly what impact that would have on the hundreds of proposals filed each year, although it may require pension funds like the California Public Employees Retirement System and those managed by the NYC Comptroller Scott Stringer to take up more of the burden.
Gates Capital Management's ECF Value Funds have a fantastic track record. The funds (full-name Excess Cash Flow Value Funds), which invest in an event-driven equity and credit strategy Read More
The changes have provoked widespread dismay among investors, in part because unlike reforms to proxy adviser regulations, they are every bit as strong as when they were first suggested. The Council of Institutional Investors (CII) and several shareholder proponents also complained of an "11th hour submission" by SEC’s Chief Economist S.P. Kothari, who revealed that the changes would mean less than a quarter of retail accounts would own sufficient stock to make proposals at most companies.
Andrew Behar, CEO of advocacy group As You Sow, which files shareholder proposals on behalf of individuals or groups, says the requirement for proponents to meet with companies could be tantamount to removing As You Sow’s de facto power of attorney, and will deter shareholders from supporting campaigning organizations like his.
Another important change will see the support required to submit proposals in consecutive years rise from 3%, 6%, and 10% on first, second, and third resubmission to 5%, 15%, and 25% respectively. The SEC says 95% of proposals that go on to receive majority support clear these thresholds but shareholder advocacy groups say many important governance proposals would have been lost if the rules had been in effect for 2020, and winning majority support for non-binding resolutions may not be the only way of influencing change.
"It was a bad day for shareholders, society, and the environment," James McRitchie, a frequent shareholder proponent, told me. "Raised resubmission thresholds will kill a great many environmental and social proposals."
The point was also made by the dissenting Democratic Commissioners. "Climate change, workforce diversity, independent board leadership, and corporate political spending, as well as other ESG-related issues, are increasingly important to investors—and increasingly present on proxy ballots," said Allison Lee before the vote, adding that a recently proposed Department of Labor rule change would "restrict ESG investment by retirement plans, and make it harder for such plans to vote on ESG-related proposals." Many shareholder proponents have similar concerns.
Republicans on the Commission, including Chairman Jay Clayton, have framed the issue as one of cost. However, CII has argued that only 13% of companies in the Russell 3000 received a shareholder proposal over a three-year period, so the benefits will not be widespread. Moreover, most proposals are concentrated at larger companies, such as the S&P 500, who are less likely to see a significant hit to their bottom line.
Rather than quibble with this argument, shareholder proponents say their work saves companies and shareholders money in the long run. "Although proposals do cost something for companies to process, they can, and often do, increase the value of companies by facilitating the removal of entrenched less than dynamic boards and by addressing various risks those boards have ignored," McRitchie said.
"Having a conversation with a shareholder - isn't that what investor relations is for?" asks Behar. "It's free consulting, it's like McKinsey for free; helping to avoid tainting brands, maintain relationships with customers, get slavery out of supply chains, de-risk investments… Corporations will become authoritarian regimes. That’s not capitalism."
Trian Partners Disclose A Stake In Comcast
This week, Trian Partners disclosed a 0.4% stake in Comcast, owner of NBC Universal, Sky, and Xfinity broadband networks. While Nelson Peltz’s firm hasn’t yet made any demands public, I’ve been spending some time this week becoming familiar with the company. As a sprawling, complex corporate ecosystem, it resembles recent Trian targets DuPont and Procter & Gamble even down to being a community company – just as DuPont owned a theater and hotel in Wilmington, Delaware, Comcast owns its local hockey team, the Philadelphia Flyers. In some other respects, it resembles General Electric – rapidly deleveraging following the blockbuster acquisition of U.K. television network Sky, and with some business units suddenly challenged albeit by external problems.
Specifically, the coronavirus has hit Comcast’s Universal theme parks, once one of the fastest-growing parts of the business, hard. Universal’s movie studio was already stumbling last year and will likely generate a lower return on investment, based on rival Disney’s decision this week to push many releases to the second half of 2021 as recent releases have disappointed.
On the other hand, Comcast’s stock price has responded to the additional business the company has picked up from new broadband business and the resumption of live sports. Over the horizon, NBC will host two Olympic Games and a Super Bowl in the next 18 months, while it is just getting into the streaming wars. New businesses, like cell phone service, have tended to do well even if they add little to an enormous bottom line. CEO and Chairman Brian Roberts has added $10 billion of Ebitda in the past four years alone. This, and his one-third share of the voting rights should earn Roberts a relatively gentle treatment from Trian. Whether the two sides have a common vision for the future will only emerge in time.
Quote Of The Week
Quote of the week comes from Elliott Management Portfolio Managers Jesse Cohn and Marc Steinberg in a letter to Cubic, responding to the transportation and defense systems company’s decisions to make buyout talks public and adopt a poison pill:
"While we are disappointed with the board's decision to impose a shareholder rights plan, we are pleased that the board has acknowledged its fiduciary duty to engage in good faith in pursuit of the value-maximizing outcome for Cubic and our fellow shareholders."