It’s a jungle out there.’ That’s how one CEO of a large US corporation describes this proxy season. And when you consider the ferocity of some of the proxy campaigns waged over the last ten years you can see what he means. The one that stands out most in his mind is the campaign run by Institutional Shareholder Partners in 1992 against Sears, in which the Bob Monks/Nell Minow team placed an ad in the Wall Street Journal which had a picture of all the company’s directors above the slogan: Non-performing assets. ‘I mean imagine being one of those nine men.’
There are numerous other examples. Sometimes CEOs are ousted as a result of proxy campaigns, for example at WMX Technologies (since renamed Waste Management) and Unisys last year. In other cases companies see the writing on the wall and capitulate before there is too much trouble. In 1997, for example, Comsat averted a nasty proxy contest by agreeing to dissident shareholder Guy Wyser-Pratte’s election to the board. And under similar circumstances earlier this year, Apria Healthcare appointed noise-maker Ralph Whitworth as a director.
Companies also have to contend with the worry of whether they’re going to feature on someone’s focus list. Everyone seems to have one these days: pension funds like Calpers, unions like the Teamsters, and associations like the Council of Institutional Investors all produce annual lists of the companies they plan to go after. Even the press has got in on the act and Business Week’s annual rundown of the worst boards in America makes particularly galling reading for the ten unlucky subjects.
But how do you know which groups offer a serious threat and which are a mere annoyance? What are the signs that a proposed shareholder resolution is going to escalate into a full scale proxy campaign rather than, at best, win a handful of votes at the annual meeting?
Drawing the line
For Stan Kay of proxy firm MacKenzie Partners, the demarcation line is whether or not someone is willing to mail a proxy form. ‘Those who aren’t going to solicit aren’t really serious, however much the press might be behind them,’ Kay says. ‘Even if they’re lucky and a resolution goes through, most of them are just precatory motions. Companies aren’t bound to do anything,’ he adds.
That, in effect, dismisses most of the social and religious lobbies who put almost all of their proposals on management’s ticket. John Cornwell of proxy firm DF King agrees that this group offers more smoke than fire. ‘If there was any real strength in that lobby it would show in the levels of support they receive. Some of the issues they raise are really attractive – I mean this is the apple pie stuff that America is all about, but it’s not the sort of material to base investment decisions on. Institutions are just not going to back people on these sorts of issues and the number of votes they get is proof of that,’ Cornwell says.
Pat McGurn of Institutional Shareholder Services disagrees, pointing to the recent pressure that the social and religious lobby has managed to exert on the SEC over its proposed reforms to the proxy process as evidence of its growing strength. ‘Recent proposals backed by organizations like the Social Investment Forum and ICCR, although still social in character, also have corporate governance implications so there is more scope for support from the institutions,’ he says. McGurn also points to the increasing number of socially responsible funds which are attracting higher and higher levels of investment.
Nick Rossi, an individual investor who, alongside his father Emil and brother Chris has been submitting shareholder resolutions for years, readily admits that the level of support they get is low – usually in the range of 5-15 percent. ‘But that’s just the votes cast at the annual meeting; it doesn’t give a real indication of how many shareholders actually support our resolutions,’ Rossi says. And anyway, he adds, that’s not the real issue. ‘Our role is advisory. We know we’re not going to get these things passed off the bat but slowly, gradually, we are changing philosophies in corporate America. Companies may not adopt things now but they will when they see everyone else start to do it.’
A classic case of this is the issue of linking directors’ pay with a company’s performance. It’s a favorite of the Rossi family who submitted proposals to pay directors in stock at BankAmerica, Louisiana Pacific, Pacific Enterprises and Pacific Gas & Electric last year along with a similar proposal at Occidental Petroleum this year, for example.
‘Ten years ago most directors didn’t own any stock whereas today the majority own substantial amounts. That’s down to shareholder advocacy. As long as we keep up the pressure, companies eventually start to come round to our point of view,’ Nick Rossi comments.
Going for the jugular
But some activists are less happy with simply fulfilling an advisory role and taking a wait-and-see attitude. ‘We’ve found that companies usually decide to leave our advice when they have the option to,’ says Kurt Schacht, general counsel for the State of Wisconsin Investment Board (Swib). ‘We feel the time has come to amend their bylaws.’ Schacht is talking about binding resolutions which, if adopted, would force companies to comply with dissident proposals that are passed. (Swib is not the only player pursuing binding resolutions, they’ve also become a favorite of labor unions like the Teamsters, which has filed one at Kmart this year, and the Service Employees International Union which has filed one at Columbia/HCA. They also attract noise-makers like Guy Wyser-Pratte who has submitted a shareholder bylaw provision at Pennzoil.)
Swib is considered to be one of the more aggressive public pension funds. Whereas other institutions like TIAA-Cref and Calpers have increasingly chosen to negotiate with companies behind closed doors rather than try to embarrass them into action in public, Swib has sometimes taken a harder line. But, Schacht says, it always tries to talk to companies first. This year the fund’s big issue is to stop the repricing of options and it has filed letters with 24 companies to adopt ‘no repricing’ policies. According to Schacht, resolutions have only been filed at four of the companies, with the others either agreeing to adopt the new policy or still awaiting further discussions.
So does a more aggressive stance work? According to Arthur Crozier of proxy firm Innisfree, it really depends on who you are and what your agenda is. ‘Swib’s forceful approach works because the fund generally puts its weight behind one really big issue, like repricing. For funds that are trying to bring about more broad-based change, like greater accountability, then a behind-the-scenes approach is probably more appropriate,’ comments Crozier.
In terms of the unions – considered by many to be the bad boys of the proxy scene because of their aggressive approach – sometimes it works and sometimes it doesn’t. ‘The unions know which are the hot buttons to press,’ comments DF King’s Cornwell. ‘They know which proposals will generate votes. For example, many institutions will support certain issues like board and director independence regardless of the company they’ve been proposed at and the unions will exploit these sort of situations. But companies will sometimes look at the story behind the proposals and then they can see through the union’s intentions.’
Surprisingly, perhaps, the ‘story’ behind the proposals does not appear to be something the unions themselves seem particularly anxious to hide. ‘Our central aim is to increase our leverage to negotiate wages and benefits for our workers. We raise issues in the public forum to increase our power at the bargaining table,’ explains Patrick Hunt, an economist at the Communications Workers of America (CWA). ‘We used to apply pressure by striking but that simply doesn’t work anymore. Now that a lot of our members own stock through Esops and other plans, the shareholder proposal route has become a really good lever for specific proposals,’ Hunt adds.
CWA has to be quite selective in the sort of issues it puts forward. ‘Shareholders are only interested in a very narrow range of issues. We have to find places where our interests coincide and go with them,’ Hunt says.
A classic example is Disney where a few weeks ago CWA teamed up with TIAA-Cref at the company’s February 24 annual meeting on the issue of board independence, winning over 35 percent of the vote. Similarly, the union has put forward a proposal at GE to get rid of directors’ pension plans, in a dual bid to reform workers’ pension packages as well.
But according to MacKenzie Partners’ Stan Kay, the largest threat to companies doesn’t come from unions, individuals or pension funds but from so-called noise-makers, who not only try to push for better performance but also push to get their own people on board. ‘Once you’ve got a wolf in the henhouse you’re really in trouble,’ says Kay.
DF King’s Cornwell characterizes this group’s approach as much more proactive than that of the public pension funds. ‘Whereas the institutions will say to companies, Look at how bad your results are. What are you going to do about it? and put pressure on them to change, the noise-makers actually become managers. They do their own economic research. They suggest ways to improve performance and come up with plans of how companies should sort their situation out,’ Cornwell explains.
The noise-makers
One example is Greenway Partners, a $500mn New York-based investment partnership. Senior managing director Alfred Kingsley says his main objective is to increase value for all the shareholders of a company. ‘We want to enhance shareholder value. So it’s not surprising that we get the backing of other shareholders.’ Last year, for example, Greenway managed to mobilize institutions like Calpers to come out in a ‘just vote no’ campaign against directors at Unisys. ‘We thought they needed a change of management,’ explains Kingsley. And he got it. Although Greenway didn’t win the vote, Unisys’s CEO stepped down and, Kingsley says, so far at least, he is happy with the replacement. ‘We’re going to give him a bit of a honeymoon this proxy season to see how he does.’
This year Kingsley is going after Inland Steel and Woolworth. At the latter, Greenway has a resolution for the company to dispose of its retail operations in Germany. ‘With the proceeds, we want the company to buy more stock,’ insists Kingsley. We’re not interested in long-term issues like corporate governance but rather in shorter-term moves that make more solid financial sense.’
But although the approach of noise-makers like Greenway may differ from those of the big pension funds as at Unisys, they often get substantial institutional support behind them. ‘Activist investors like Guy Wyser-Pratte, Michael Price, Providence Capital or whoever, usually have minimum holdings and yet they regularly gain 20, 30, 40 percent of the vote at some of these proxy contests. That’s because time and time again the institutions support them,’ says ISS’s Pat McGurn. He thinks the noise-makers have created the perfect foil for the institutions. ‘For years and years, the public pension funds were the lone voice on corporate governance and considered themselves to be footing the whole bill. Now they’ve got activists pushing for quick, sometimes drastic change so, rather than use corporate governance initiatives to raise a company’s financial performance as they did before, they can now concentrate on governance for governance’s sake,’ explains McGurn. He points, for example, to TIAA-Cref which doesn’t look at a company’s financials anymore but sees corporate governance as its priority. This proxy season, for example, its main issue is board independence and it is pushing for it at companies like Disney despite solid financial performance.
According to McGurn, a pattern developed last year where, in face of pressure from noise-makers, backed up by institutional support, more and more companies capitulated on issues before they actually came to vote. Examples from 1997 include Comsat, Ashland Company, Mesa Air Group and Waste Management, where the companies all made some significant strategic change – often electing a director from a dissident slate onto the board – before they actually had to. ‘It’s a decision based on discretion being the better part of valor,’ says McGurn. This year, a similar pattern looks set to continue. Apria, as already mentioned, capitulated to pressure from Relational Investors, giving its managing director Ralph Whitworth a place on the board.
Innisfree’s Art Crozier sees a three-pronged attack ahead for companies in 1998. ‘You’ve got Ken and Bill Steiner with 24 proposals for ‘sale of the company’ out. Combine that with Greenway Partners, still pushing for a spin-off at Inland Steel, and Gabelli Asset Management calling on Media General to commit its directors not to pursue further acquisitions, and you’ve got a pretty lethal combination,’ Crozier says. And there’s plenty more where that came from. Wyser-Pratte’s bid for a seat on the board at Pennzoil as well as his push for the company’s adoption of a shareholder bylaw provision, along with Lens’s and Michael Price’s double pursuit of Readers Digest, promise to inject further excitement into the 1998 proxy season.
According to Pat McGurn, this kind of direct action approach is here to stay. ‘It’s going to become more important than the shareholder resolution process.’ And he doesn’t just mean for the noise-makers. The public pension funds are also starting to get in on the action, not necessarily directly but through their connection with smaller groups. Swib, for example, has an equity position in the Lens fund and Calpers and the State of Maryland both have a position in Relational Investors. Furthermore, McGurn suggests that Calpers’ announcement that in future it might seek seats on corporate boards is more of a probability than the fund is suggesting and could take off for other pension funds too. ‘This is the face of the future.
