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New York Times, November 1, 2009 column

 

November 1, 2009

Fair Game

When Shareholders Crack the Whip

IN a promising show of force by a company’s owners, three directors at Texas Industries, a construction materials maker with almost $850 million in sales, got the boot last week. Taking their seats at the boardroom table will be directors nominated by Shamrock Holdings, the money management firm best known for helping to oust Michael Eisner from his perch as chief executive of Disney.

The results of the Oct. 22 election at Texas Industries, disclosed last Tuesday, are an example of what happens when shareholders act appropriately — like the company owners that they are. Equally important, Shamrock executives say they believe their win at the company shows that shareholders are becoming increasingly willing to take on entrenched directors.

Directors, of course, have a fiduciary duty to look out for shareholders. Instead, many directors have simply served as rubber stamps for the chief executives they are supposed to be overseeing.

While no single election proves that investor attitudes are a-changing everywhere, the Texas Industries slapdown was unambiguous. More than 80 percent of the shares cast at the meeting were voted against the incumbent directors; more than 90 percent of those shares were voted for three proposals put forward by Shamrock.

One proposal required the company to submit its anti-takeover mechanism, a “poison pill,” to a shareholder vote; the other two argued that directors should be made to stand for elections annually (making it easier to oust an incompetent board member) and that directors in uncontested elections could win their seats only if they received a majority of shares in support.

Shamrock’s executives have taken the activist road for many years, and if they think shareholders are becoming more active then it’s time to cheer.

“I cannot remember where a significant corporation of this size got an 80 percent turndown from its own shareholders,” said Stanley Gold, chief executive of Shamrock. “People are beginning to think like owners.”

A LITTLE background: Texas Industries’ stock has underperformed its peers consistently over one-year, three-year and 10-year periods. Not surprisingly, its shareholders are anxious, and over the past two years a growing number of them have expressed displeasure to Texas Industries’ directors.

For example, director elections in 2007 didn’t go well for two incumbents, who received “nay” votes from one-quarter of the shares cast. At last year’s election, almost half of the votes cast were against the incumbent directors. Nevertheless, the Texas Industries board didn’t seem to “get” these messages. Indeed, when a director resigned last year, he was replaced by a former board member from a few years earlier.

After analyzing the company, Shamrock concluded that it was an undervalued asset whose prospects were stymied by arrogant and unaccountable management. The investment firm started buying the stock in the second half of 2008.

Initially, when Shamrock wrote letters to the Texas Industries directors suggesting how to change the company’s governance practices, it received no response from them. “We had a real tough time getting management to sit down and talk to us,” Mr. Gold said. “The chief financial officer finally did, and late in the game, the C.E.O. and ultimately the chairman came by. But fair to say, while the conversations were polite, they just stonewalled us.”

A spokeswoman for Texas Industries didn’t respond to two requests for an interview.

Shamrock decided to take its case to the company’s owners. In late June, the three directors it was proposing for board seats fanned out across the country, meeting with big investors and making their arguments for change. They were Marjorie L. Bowen, a former managing director of Houlihan Lokey Howard & Zukin, an investment firm; Gary L. Pechota, a former chief executive of Giant Cement Holding; and Dennis A. Johnson, a managing director at Shamrock.

Mr. Johnson said he met with two dozen investors in person and spoke by phone with others. It helped that Texas Industries shares were largely in the hands of institutional investors rather than individuals.

“Within the first three weeks I met with investors representing probably 60 percent of the shares outstanding,” Mr. Johnson said. “We pursued the proxy contest conveying our message that this is an undervalued company with a lot of potential and our assessment of what some of the solutions to this problem could be. We wound up by asking the shareholders to get on board and help effect this change with us.”

The meetings went on until the day before the Texas Industries annual meeting on Oct. 22, Mr. Johnson said. “We didn’t run across anyone who said they opposed what we were doing,” he added.

At the annual meeting, Mr. Johnson said the company let him make an eight-minute speech outlining Shamrock’s reasons for taking up the proxy fight. Nevertheless, when shareholders at the meeting asked questions of Mr. Johnson, the board didn’t allow him to answer, he said.

Once the vote was tallied, it showed that Shamrock’s message had come through loud and clear to shareholders, including public pension investors and private mutual funds. While public funds have been more willing to take up such fights, Mr. Johnson says he’s now seeing an interest among mutual funds that previously shunned the activist route.

“In the past, you had a lot of skepticism about activist investors that prevented large institutional investors from wanting to talk to you,” Mr. Johnson said. “Secondly, there was this natural conflict where a lot of institutional investors wanted to make sure they would continue to have access to management of the companies they own. But that is less the case today, and that’s why it’s very good for shareholders going forward.”

To be sure, a proxy battle like Shamrock’s is expensive and out of the reach of many investors. Mr. Gold estimated that his campaign cost roughly $1 million, adding approximately $1 a share to his firm’s cost basis in the stock.

Such costly battles illustrate why it’s crucial that shareholders be allowed to put up alternate slates of directors without having to spend millions of dollars, Mr. Gold said.

“There needs to be democratization of the boardroom,” he said. “Boardrooms will say it will be like Congress and everyone will be arguing. But capitalism is based on democracy: it is a bit messy, but it’s the best system we’ve come up with.”

 

 

A version of this article appeared in print on November 1, 2009, on page BU1 of the New York edition.

 

Copyright 2009 The New York Times Company

 

 

 

 

 

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