The Deal

The top proponent of shareholder proposals spoke to The Deal’s Activist Investing Today podcast about what he thinks would happen if the nation’s securities regulator made it more difficult to submit proposals on environmental, social and governance issues.

Goodwin On CEO Lobby’s ‘Stakeholders’ Push -The chief of the Applied Corporate Governance Institute told The Deal that Milton Friedman’s 1970 doctrine of shareholder primacy is misunderstood and that the Business Roundtable’s recent ‘stakeholders’ statement of purpose may have a hard time enduring the next recession.

Activist funds face an uphill effort getting the votes they need to effectuate change. That’s the view of Mark Roe, professor of Law at Harvard Law School. Roe spoke with The Deal for its Activist Investing Today podcast about why he thinks that observers should be wary about blaming activist hedge funds for perceived short-termism in the markets. “They [activists] have to have a really persuasive explanation for why something should change in their target company, enough so that index funds, pension funds and others, who initially are inclined to favor management, back their efforts,’ Roe said. In a wide-ranging conversation, Roe suggested that there is a widespread, possible misperception that the public stock markets are particularly short term, with hikes in buybacks and cuts in research creating problems in corporate America. However, Roe argues there is mixed data on the subject. He points out that capital expenditures are down everywhere in the developed world, but less so in the U.S. “There is something else going on,” he said. “Activist engagements are up over the past 10- or 15 years. R&D is up significantly over the past 10 or 15 years.” Roe reviews the concept of so-called “loyalty shares,” which give investors more votes the longer they hold shares. The approach, known as time-phased voting, has long been common in France. “The experience in Europe seems to be that the loyalty shares don’t promote long-termism, but they do facilitate continuing control by founders over a long period of time,” Roe said. “Speaking of activists, the most immediate impact is that activists would have a lower percentage of the vote because they haven’t held shares for two years prior to their campaign typically.”

Some settlements reached between activist hedge funds and corporations represent an “unconditional surrender” by the targeted firm rather than a truce. At least that’s the view of State Street Global Advisers' vice president of the asset stewardship team Philip Vernardis, who spoke with The Deal for its Activist Investing Today podcast about why he thinks companies should do a better job of speaking to their long-term holders (Read: State Street) before reaching agreements that add insurgent-backed director candidates to corporate board. “With shareholder activism rising in recent years…, we’ve also have seen companies entering into settlement agreements with activists more often and much faster than ever before,” Vernardis said. “These agreements are being negotiated between companies and activists behind closed doors, therefore without the voice of long-term investors. In some cases, they resemble an unconditional surrender by the company…” In a wide-ranging conversation, Vernardis said State Street, which has $2.8 trillion in assets, is urging companies to set up longer standstill agreements with fund managers, so hostilities can’t re-emerge quickly in subsequent years. He also believes companies should require activists to hold shares for longer periods “to align them with longer-term shareholders.” Directors affiliated with the activist should tender their resignation if the activist’s stake falls below certain thresholds, he added. Corporate governance is another big issue for State Street. Vernardis notes that the index fund screens corporate directors by the length of their tenure and whether companies have staggered director elections as well as other factors. Since 2014 State Street has voted against over 1200 companies over board refreshment issues. “It’s always about board accountability,” he said. “Annual elections can help increase accountability within a firm, so we take that into account.” Finally, Vernardis also explained State Street’s policy when it comes to the growing trend of corporation’s conducting IPOs giving insiders control of the vote, a major accountability issue for the fund.

A lawsuit or two challenging California's recently approved board diversity law requirement is likely to emerge, though the proponents of such a challenge may not be immediately apparent. At least that's the view of Columbia Law School Professor John Coffee, who spoke with The Deal for its Activist Investing Today podcast about a new trend of legislators pushing to require corporations headquartered in their states to set up diverse boards. In California, a recently approved law requires one female to be installed on each locally-headquartered, publicly-traded corporate board by the end of this year. Coffee suggested that corporations based in the state without women directors may decide against filing a lawsuit challenging the restriction because of what he calls a "high embarrassment" cost. However, he also suggested that "ideological organizations" on the right, such as the CATO Institute, may bring derivative actions, buying a small number of shares, and suing in the name of the company to contest the California law."It would require some degree of collusion between the company and investor, but it is possible we would see that as well," Coffee said. "There is a quite uncertain future facing this legislation."

Activist hedge funds hurt research & development budgets at U.S. corporations, which has a broader negative impact on the economy.At least that’s the view of Columbia Law School Professor John Coffee, who spoke with The Deal for its Activist Investing Today podcast about a study he co-authored on the impact of insurgent managers on corporations and the markets overall.In a wide-ranging conversation, Coffee explained what he thinks is going on with Carl Icahn’s objections to Occidental Petroleum’s acquisition of Anadarko Petroleum and what he thinks might be at play when activists try to nullify blockbuster mergers. Coffee, who runs Columbia’s Center on Corporate Governance, also discussed his thoughts on a new Securities and Exchange Commission effort seeking to rewrite the rules for proxy advisers Institutional Shareholder Services and Glass Lewis.

Canada currently doesn’t have legislation mandating a non-binding vote of shareholders on executive compensation, but legislation percolating on Parliament Hill in Ottawa is likely soon to change the situation. That’s according to Catherine McCall, executive director of the Canadian Coalition for Good Governance in Toronto. McCall talked to The Deal for its Activist Investing Today podcast about why she thinks a Canadian federal government amendment requiring a non-binding say on pay has a “pretty high” chance of being adopted. She also touched on the group’s efforts regarding director qualifications, when it comes to environmental and social risks as well as about efforts to gently push Canadian companies into becoming more diverse.

The Activist Investing Today podcast spoke with The Deal’s media, technology and communications expert Chris Nolter, about whether there would be interest in acquiring Sony’s entertainment assets now that it appears Third Point’s Dan Loeb is seeking to shake things up at the Japanese diversified multinational company. Nolter noted that Sony owns a major Hollywood studio and “there just are not that many of them, so it always has been valuable.” Nolter points to a bidding war that led to a sweetened $71 billion sale of Fox’s TV production and other operations to Disney, as an example why buyers could be interested in buying Sony’s entertainment assets. He notes that Sony could set up a joint venture of sorts, as an alternative to a sale. The podcast reviewed whether other factors could be playing into the potential Third Point campaign, such as a change in management and new Japanese spin off tax laws.

It’s okay to call activist investors corporate raiders. At least that’s the view of Jeff Gramm, the author of “Dear Chairman: Boardroom Battles and the Rise of Shareholder Activism.” Gramm talked to The Deal for its Activist Investing Today podcast about his book, why he launched a proxy fight at Texas Restaurant chain Luby’s and what he thinks about CEO pay packages.“ One big theme of the book is that these shareholder activists through history are kind of all the same,” Gramm said. “They are economic actors out to seek a buck on their investments in public companies and they use engagement with public companies as a means to generate their alpha.”

In 2015, Ertan Enginalev, launched his first public insurgency campaign in Turkey, urging an industrial conglomerate, Akfen Holdings, to consider strategic options such as listing a minority stake of a container port it controlled. Enginalev took some time to speak to The Deal’s Activist Investing Today podcast about the experience and why he thinks Turkey’s investor make up can make the country a strong candidate for public and private activism, even though most companies are insider-controlled and appear to be impenetrable. Under pressure from WSD, Akfen’s shares shot up, outperforming the BIST 100 Index, Turkey’s benchmark stock index, by 151 points over 12 months. By 2019, Akfen was taken private, giving Enginalev his first big win in Turkey. Since then, Enginalev has set up three additional Special Purpose Vehicles with two-year lockups to fund three additional campaigns, all of which, so far, have remained collaborative and private.