Shareholder activism is playing an increasingly important role in corporate America and the world. Major activism campaigns involve board representation, shareholder rights, and M&A matters, mainly including mergers and spin-offs. According to a publication by Linklaters, since 2010 shareholder activism rose by 80% and 62% in the U.S. and Europe, respectively. Corporate governance and shareholder activism has recently been in the spotlight as a result of various high profile activist campaigns including Carl Icahn’s push for eBay to spin off PayPal. Amended U.S. Securities and Exchange Commission (“SEC”) rules concerning shareholder engagement and the Dodd-Frank Act have also brought shareholder activism into the public eye. Several independent agencies are taking interest and publishing guidelines to that effect. The Shareholder-Director Exchange and the Conference Board have recently released a set of suggestions to improve investor relations.
The Shareholder-Director Exchange, jointly supported by Tapestry Networks, Cadwalader, Wickersham & Taft LLP, and Teneo Holdings, together with Broadridge Financial solutions, has released a 10-point protocol that offers guidance on best practices of shareholder-director engagement. Further, the Conference Board, along with a group of Wall Street advisers, released a set of recommendations to improve relations between executives, board members, and investors. These guidelines offer alternative means of addressing the issues of investors’ concerns on the way the decisions are made by executives and directors. The only difference in these approaches is that Conference Board’s suggestions apply to special circumstances whereas SDX Protocol offers a process for engaging shareholders, executives, and directors on routine matters. There is a fine line between efficient use of resources and the burden that may come from over-engaging the executives and directors.
Shareholder activism may appear like a low-hanging fruit to unlock shareholder value but there are costs associated with activism. It takes a significant amount of capital to gain a few percentage points stake in a public company. Hedge funds and institutional investors as activists only unlock the value by influencing key decisions and they don’t offer day-to-day operational or managerial support to make a company function better than a private equity firm may do. Addressing rules of engagement can establish trust in the campaigns but doesn’t address underlying fundamental shifts required to unlock the long-term value.
SEC Chairwoman, Mary Jo White, spoke at the 10th Annual Transatlantic Corporate Governance Dialogue about the recent changes the SEC and U.S. lawmakers have made to address the concerns of activist investors. Major changes to the Securities and Exchange Act of 1934 include Amendments to the Rules on Shareholder Proposal, say-on-pay advisory votes that provide an easier route to discussion via proxy access, new standards applied to compensation committees, new compensation “clawback” policies under the Dodd-Frank Act and the reversal of the “Cracker-Barrel” no-action letter. All these changes reflect that there is gradual but significant momentum building for repairing the relations between boards and investors.
Another area in corporate governance that requires attention is the role of proxy advisory firms. Glass Lewis and Institutional Shareholder Services are two of the world’s major proxy advisory firms providing a variety of proxy related services including voting recommendations to its clients. The key issue in proxy advising is that many investors may accept those recommendations without doing their own due-diligence. The influence of these firms may hinder the rules of engagement between companies and shareholders. Further regulatory changes are required to address those concerns to minimize the conflicts of interests and increase the reliability of those recommendations.
Corporate governance and shareholder activism will continue to evolve in the coming years. The financial recession, insider trading, whistle-blowing, and corporate scandals have brought shareholder activism in the spotlight. It’s going to be a long journey before companies will win the trust of investors and the public in order to align their operations to offer greater transparency and a higher return on capital to shareholders.
EDITOR’S NOTE: The Berkeley Business Law Journal and Berkeley Center for Law, Business and the Economy are hosting their annual 2014 Symposium this Friday on Shareholder Activism. The event will be covered extensively on The Network.