June 25, 2015

Building Meaningful Communication and Engagement with Shareholders

Society of Corporate Secretaries and Governance Professionals: 69th National Conference (Chicago, Illinois)
By Chair Mary Jo White

Thank you, Jeff, for that kind introduction.

I am honored to be with you here in Chicago at the Society’s 69th National Conference. Over the years, the Society has consistently provided thoughtful comments to the Division of Corporation Finance and the Commission on a wide variety of issues and proposed rules. You understand the complexities that can affect multiple parties and recognize the importance of the interests of shareholders. All of you play a critical role in corporate governance. It is the decisions you make, the practical solutions you advance and the views you share with your boards that can, in large part, dictate the relationship between shareholders and companies.

Because of your central roles in your companies, many of the Commission’s initiatives are of interest to you: our disclosure effectiveness review; the audit committee disclosures concept release the staff is working on; and any number of our rulemakings. My hope is that you will see near-term activity in these and other areas, including rules mandated by the Dodd-Frank Act, such as the clawbacks rule as required by Section 954, the pay ratio rule under Section 953(b) and the joint rulemaking on incentive compensation as required by Section 956. So stay tuned for those developments.

But today my focus is on a selection of proxy-related issues, another area of particular interest to you. And my overall theme complements the theme of your conference, “Connect, Communicate, Collaborate.” Be proactive in building meaningful communication and engagement with your shareholders.

June 11, 2015

Why Vanguard and BlackRock could beat Peltz and Icahn

Huge index-fund asset managers are growing more willing to use their clout to influence boards and CEOs.
By Ram Charan, Geoff Colvin

It was the corporate version of Mayweather vs. Pacquiao—DuPont CEO Ellen Kullman battling activist investor Nelson Peltz in a high-profile proxy fight over whose slate of directors should be elected to DuPont’s board. And like the injured Pacquiao, it turned out that Peltz was going into the fight with a major handicap to which most of the public was oblivious.

While Kullman and Peltz spent months campaigning for their candidates, the real muscle in this recent bout belonged to three companies that the media largely ignored: BlackRock, Vanguard Group, and State Street, the asset-¬management firms that were DuPont’s largest shareholders by far. Though Peltz’s Trian Fund Management owned a substantial stake in DuPont—24 million shares—it was dwarfed by the three big institutions’ combined holdings: about 150 million shares owned on behalf of investors in their funds. On the morning of DuPont’s annual meeting in May, Kullman and Peltz got word that the giants were voting all their shares for Kullman’s slate, sealing the outcome of a closely fought contest. Kullman won, but BlackRock, Vanguard, and State Street provided the victory.

It’s a sign of changing times. High-profile activists like Peltz, Carl Icahn, David Einhorn, and Bill Ackman have shaken the giants of the Fortune 500 over the past 18 months. Icahn increased the market capitalization of the world’s most valuable company, Apple, just by sending two tweets. But such headline-grabbing successes may have marked the apogee of their influence. The new reality is that the activists are not today’s true power players in corporate America. The biggest companies are increasingly influenced by a new set of bosses—small in number, working mostly behind the scenes, and becoming more activist by the day. Together they’re creating a new order for large corporations and even changing the way the capitalist system operates. They’re the biggest of the big institutional investors, the largest asset managers.

April 29, 2015

Wachtell Lipton explains Some Lessons from DuPont-Trian

By Martin Lipton

The ISS Report on the DuPont-Trian proxy contest calls attention to a number of important insights into ISS policies and practices and those of many of its institutional investor clients. Concomitantly, these policies illustrate the realities of the sharp increase in activist activity and the steps corporations can, and should, take to deal with the activist phenomena.

ISS and major institutional investors will be responsive to and support well-presented attacks on business strategy and operations by activist hedge funds on generally well managed major corporations, even those with an outstanding CEO and board of directors.

Trian Fund Management and its founder, Nelson Peltz, have clearly established credibility and acceptability. So too other well regarded funds like ValueAct. They have become respected members of the financial community.

An activist who attempts to work behind the scenes with a corporation to advise and achieve changes will have more credibility than one who surfaces with an attack.

In most cases a corporation will be well advised to meet with the activist and discuss the activist’s criticisms and proposals, which are frequently presented in the form of a well-researched whitepaper. If the activist’s recommendations are not unreasonable, careful consideration should be given to adopting some or all, thereby avoiding a public dispute. In situations where the activist seeks board representation to pursue its objectives, depending on the circumstances it may be the best course of action to consider agreeing to board representation on condition of an appropriate standstill agreement.

Major institutional investors like BlackRock and Vanguard want direct contact with the independent directors of corporations. Waiting to establish investor-director contact until under an activist attack is too late. Meaningful director evaluation has also become a key objective of institutional investors and a corporation is well advised to have it and talk to its investors about it. Regular board renewal and refreshment can be important evidence that meaningful director evaluation is occurring. In the DuPont situation, ISS did not accept DuPont’s argument that the addition of two “super star” directors to its board, after the attack started, obviated any reason to add Mr. Peltz and one of his nominees.

April 10, 2015

Shareholder Activism: an Engagement Opportunity

By Yaron Nili, HLS Forum on Corporate Governance and Financial Regulation

Editor’s Note: The following post comes to us from Ernst & Young LLP, and is based on a publication by the EY Center for Board Matters.

The recent surge in shareholder activism continues to keep boards on alert heading into the 2015 proxy season. Some companies are taking proactive measures to prepare for potential activist investor campaigns, including engaging long-term institutional investors.

Based on what we’re hearing from long-term institutional investors, these efforts are worthwhile in that they foster constructive relationships and alignment with key shareholders.

The EY Center for Board Matters (the Center) recently had conversations with 50 institutional investors, investor associations and advisors on their corporate governance views and priorities. We also gained insights from investors, directors and other stakeholders through our proxy season dialogue dinners.

This post is the second in a series of four posts based on insights gathered from those conversations and previewing the 2015 proxy season. The first post (available here) focused upon board composition. The upcoming two will focus on proxy statement disclosures, and the shareholder proposal landscape.

In addition to the Center’s investor outreach, the report draws on our tracking of governance trends and emerging developments through the Center’s proprietary corporate governance database.

Key Findings
• When companies engage with long-term institutional investors and demonstrate responsiveness to their concerns, those same investors are better positioned to support the company in an activist situation and may prove to be the company’s strongest allies.
• Most of the investors we spoke with believe that whether activism is beneficial over the long term depends on the particular circumstances involved.
• Some investors suggested that activists are incorporating governance changes as an afterthought to appeal to long-term institutional investors—not out of a genuine commitment to enhance corporate governance.

March 28, 2015

At U.S. Companies, Time to Coax the Directors Into Talking

By Gretchen Morgenson


It’s shareholder meeting season again, corporate America’s version of Groundhog Day.

This is the time of year when company directors venture out of the boardroom to encounter the investors they have a duty to serve. After the meetings are over, like so many Punxsutawney Phils, these directors scurry back to their sheltered confines for another year.

This is a bit hyperbolic, of course. But institutional investors argue that there’s a troubling lack of interaction these days between many corporate boards in the United States and their most important investors. They point to contrasting practices in Europe as evidence that it’s time for this to change.

“It’s a very different culture in the U.S.,” said Deborah Gilshan, corporate governance counsel at RPMI Railpen Investments, the sixth-largest pension fund in Britain, which has 20 billion pounds, or about $30 billion, in assets. “In the U.K., we get lots of access to the companies we invest in. In fact, I’ve often wondered why a director wouldn’t want to know directly what a thoughtful shareholder thinks.”

As Ms. Gilshan indicated, directors at European companies routinely make themselves available for investor discussions; in some countries, such meetings are required. Many directors of foreign companies even — gasp — give shareholders their private email addresses and phone numbers.

March 26, 2015

Companies fail to explain board picks to investors

EY study calls on companies to better explain board composition and improve investor communications
By Adam Brown, IR Magazine

More than 75 percent of institutional investors say companies are not doing a good job of explaining why their directors are the right people for the job, according to a survey by the EY Center for Board Matters.

The lack of explanation comes at a time when investors are increasingly looking for confirmation that boards of directors have the skills and expertise needed to monitor key risks and provide strategic counsel to the company, the survey says. It also comes amid increasing pressure for proxy access by investors.

March 19, 2015

A Few Observations on Shareholders in 2015

By Chair Mary Jo White

Chair Mary Jo White gave a speech at the Tulane University Law School 27th Annual Corporate Law Institute in New Orleans, Louisiana on March 19, 2015. Chair White’s speech on cutting-edge issues in M&A included a few observations on three specific areas: the current state of shareholder activism; the shareholder proposal process; and fee-shifting bylaws. The Shareholder-Director Exchange was referenced in the speech footnotes as an example of “efforts to provide services to assist in this engagement and to establish procedures and protocols for what some think engagement should look like.”

On The Current Activism Landscape:

“Activism is used to achieve a variety of outcomes: board seats or control of the board; an acquisition or spin-off of a non-core or unprofitable line of business; or a share buyback. Negotiations between an activist and a target company may take place privately, or an activist may choose to go public. An activist may also begin a campaign behind the scenes, but go public if it believes it is not being heard or making enough progress. Any of these approaches, if used in the right circumstances, can be compatible with the kind of engagement that I hope companies and shareholders can foster.

Increasingly, companies are talking to their shareholders, including so-called activist ones.[1] That, in my view, is generally a very good thing. Increased engagement is important and a growing necessity for many companies today.”

Concluding Remarks:

“Let me stop here. What I have been advocating a bit today is a more open, constructive and balanced approach between companies and their shareholders. Companies should continue toward greater engagement with their owners, and carefully listen to their views. Activists should act responsibly and according to the rules. The strategic creativity of lawyers on either side may not always best serve the public interest. Upending the traditional roles of management, boards, and shareholders should not be the objective. Companies need their management and boards focused on their “jobs” so they can deliver shareholder value and contribute to the economic growth and innovation on which our country has always depended. But resisting all change, stonewalling every overture or ignoring the views of shareholders is also not acceptable or productive. Constructive engagement should be everyone’s goal.”

February 27, 2015

Vanguard CEO Letter

Text of a letter sent by F. William McNabb III, Vanguard’s Chairman and CEO, to the independent leaders of the boards of directors of the Vanguard funds’ largest portfolio holdings.

Don’t be dissuaded by common concerns
As with any change in behavior, there may be questions or objections from those who have yet to fully embrace
more significant engagement. That said, we do not believe these should be insurmountable barriers to progress.
Among the perspectives we’ve heard in this regard are the following:
“Strong shareholder-director engagement will disintermediate management.” This is not what large shareholders seek in an engagement program. Boards often choose to include management for legal support and to discuss operational issues. There are also matters that are the exclusive province of the board (e.g., CEO compensation), which we believe are appropriate for discussion with the board alone.
“We’ll get tripped up on Reg FD issues.” To be clear, we are not seeking inside information on strategy or future expectations. Rather, we are seeking to provide the perspective of a long-term investor. Individual firms should decide how to manage this risk. You may choose to train directors, include your legal counsel in shareholder conversations, and/or set clear boundaries for discussions.
“There is no time in our agenda.” Individual boards can decide how much time to allot to engagement. Respectfully, we’d submit that time for engagement with significant shareholders deserves consideration on a board’s agenda. After all, investors are an important constituency whom boards represent.
“This would be too difficult to implement.” Many companies already have substantive engagement programs in place. The Shareholder-Director Exchange (SDX) Protocol, available at sdxprotocol.com, offers guidance for such programs. This protocol also provides specific considerations for companies that may be concerned about Regulation FD.

February 09, 2015

Your Boards Should Think Like Activists

By Ram Charan, Michael Useem, and Dennis Carey

With more than two centuries of making everything from gunpowder to nylon and Tyvek, Dupont Co. has renewed its product lines many times. Now it is being pressed to renew its governing board as well. Its directors have turned over many times, of course, but Trian Fund Management, led by activist Nelson Peltz, is pressing for far more than a routine remake, demanding four seats of its own choosing at the table. This despite Dupont’s strong results over the past two years, its stock outperforming the S&P 500 index by 47 percent. Dupont did not give in to Nelson Pelz’s demands, but it did make big changes in its board.

Activist investors waged a record number of campaigns against U.S. companies in 2014 and show no signs of letting up in 2015. Among their trophies in 2014 was a complete housecleaning at Darden Restaurants, the largest operator of full-service restaurants in the U.S. When Darden directors backed a spin-off that many owners opposed, Starboard Capital—with the support of many institutional investors—led the ouster of the entire board. Much the same occurred at Canadian Pacific Railway in 2012, when Pershing Square Capital Management acquired control of its board.

This is a good time to renew your board before an outside activist tries to change it. Here’s why. The backing of the traditionalists like Vanguard Group is often giving activists like Trian — the latter with just 2.7% of DuPont’s shares — the extra clout they need. Vanguard holds more than $3 trillion in assets, making it the equivalent of the world’s fifth largest country in GDP, ahead of France. Along with its heavyweight brethren like Fidelity and Blackrock, it packs enormous punch. Vanguard owns some 5% of most publicly-traded companies in the U.S., and with half of its fund assets indexed, it is not going anywhere if it does not like its portfolios’ strategies or results. But that does mean indexed investors will remain passive if a company’s strategy could be strengthened or its results could be better.

January 29, 2015

Engagement and Activism in the 2015 Proxy Season

By David A. Katz and Laura A. McIntosh

As the 2015 proxy season approaches, the dominant theme appears to be the interaction between directors and investors. Though, traditionally, there was little to no direct engagement, recent experience indicates that communication between these two groups is now on the rise, in some cases resulting in collaboration. This is potentially a beneficial development, particularly insofar as it may help companies and long-term investors work together to resist pressure from activist shareholders seeking short-term profits. In the current environment where activists and hedge funds appear to wield unprecedented financial and political leverage, and the influence of proxy advisors is as significant as it is controversial, the predominant trend seems to be “toward diplomacy rather than war.”1 Organizations such as the Shareholder-Director Exchange, which began last year to offer guidance to shareholders and boards on direct engagement, are promoting policies that may reduce the incidence, duration, and severity of contentious public disagreements.