By Gene Marbach
Executive compensation, lagging financial performance, activist shareholders … these are just a few of the issues that public company chieftains and their boards will have to contend with as Proxy Season ’12 unfolds. These and other challenges come as a result of the evolving corporate governance landscape as well as the SEC’s adoption of various rules and regulations.
While hoping for the best is one course of action, actively engaging in a dialogue with your shareholders is a much better strategy. Promoting an ongoing dialogue with your shareholders can help avoid problems, particularly with activist investors such as the likes of Carl Icahn and Bill Ackman. In addition, a full engagement program can facilitate shareholder approvals for management proposals at annual meetings, particularly important given the issues surrounding executive compensation, pay-for-performance, the environment, and political contributions, among others.
First, Know Your Shareholders
“I think that companies need to keep active tabs on who their shareholders are; why they own their stock; what other tranches of the capital structure do they own; and what their intentions are in owning stock,” said Erin O’Reilly, principal of Strategic Stock Surveillance, a market intelligence firm based in New York City. “It’s imperative that the stock surveillance firm and proxy solicitor work together in order to properly target the right investors and know who to reach out to insure that management receives favorable voting recommendations for the annual meeting.”
For an effective dialogue you need to know who your investors are. Sounds simple, right?
Just check the 13F reports filed with the Securities & Exchange Commission by institutional investment managers which have investment discretion over $100 million or more.
Well, that will identify most of your holders; however, what about those managers who fall below the $100 million threshold?
Also, note that changes in share ownership positions via 13F filings can be submitted 45 days after the end of each quarter so some time can elapse before you learn the identity of a new shareholder.
Then, there are the debt holders to consider and they’re not as easy to identify, but can cause trouble for a company.
Stock surveillance firms can be of some assistance in identifying new institutional owners as well as trends that emerge prior to the filing dates. This is particularly important for companies that might be targeted by activist investors or those that have controversial issues to contend with such as executive compensation.
Take a Tip from the Politicians: “Press the Flesh”
While we may live in a world that is increasingly going “virtual,” there is nothing like an in-person meeting. A fact not lost on our politicians who help make their case by participating in Town Hall meetings and by “pressing the flesh,” among other retail politicking techniques. CEOs and CFOs would do well to take note.
Meeting with investors is a critical element of any investor relations undertaking. Your company should have an active schedule of investor meetings at major money centers such as New York, Boston, and Chicago, among others, as well as appearances at brokerage-sponsored conferences and similar events.
CEOs and CFOs are also advised to leverage their schedules and arrange “opportunistic” meetings with investors to coincide with their travel plans. In addition to arranging road shows with your company’s sell-side analysts, consider hosting an analyst day meeting to provide investors with a comprehensive overview of the company’s strategies and progress.
Typically, the emphasis is placed on meeting with potential investors; however, “bonding” with your existing shareholders is also important as you can gain critical insights into “the Street’s” view of your company as well as learn of potential issues that could blossom into full-blown crises in the near future.
Observed Patrick McHugh, Senior Managing Director, Okapi Partners, a New York City-based proxy solicitation firm, “If you’re speaking or engaging with your investors, many times you can avoid misunderstandings. It’s important to understand the issues that are of concern to them and taking steps to clarify those issues, perhaps in the form of additional disclosure.”
Engage or Enrage?
Proxy fights can be costly affairs. Companies have to “lawyer-up,” retain specialists such as proxy solicitors, market surveillance firms as well as outside investor relations counsel in combating an activist. Of course, there are the hidden costs that come with devoting time to the fight as opposed to running the company.
When an activist surfaces, some companies will immediately head for the bunker and throw up the defenses, which is not necessarily the best course of action. Some believe that is better to engage the dissidents in a discussion.
Mindful of Reg. FD issues, Keith Gottfried, M&A/Public Companies Partner with law firm Blank Rome LLP, notes, “There are ways to have conversations with investors. There are ways to hear their concerns without having to trigger Reg. FD. Some of these meetings need to be scripted, they need to have an agenda, and you could also just go and listen. Some activists just want to be able to sit in a room with you and say, ‘These are all our concerns.’”
A case in point: DST Systems, an information processing and software services company, attracted the interest of RDG Capital, a private equity firm. While the company rejected RDG’s bid to buy the company, Russell Glass, RDG’s founder, organized a meeting of DST's top institutional shareholders to try to persuade the company that it should sell noncore assets as opposed to launching a hostile offer.
While the company has not divested itself of anything, DST did retain Bank of America Merrill Lynch for a strategic review and expanded a share buyback program.
The Rules of Engagement
- Promote the dialogue, ask for feedback and act upon it
- Know your shareholders and their rationale for owning your stock
- Hire an investor relations or market intelligence firm to assist in identifying your shareholders
- Hold frequent in-person meetings with your major institutional holders
- Be mindful of Reg. FD
- Engage rather than enrage should an activist investor surface.
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Gene Marbach is group vice president at Makovsky + Company in New York. |