For a range of comments on a past
proposal for similar private meetings of investment fund proxy voting
managers with corporate board members, addressing marketplace concerns
about fair access as well as regulatory questions about information
relevant to voting decisions, see
Michelle Edkins, a BlackRock executive, helped
develop the Shareholder-Director Exchange
Relations between big public companies and their largest
shareholders can at times take on the qualities of a long, unsatisfactory
marriage. Complaints from the shareholders are many, but they go mostly
unspoken, leading to simmering resentment.
In the age of activist investing, this often leaves companies
blindsided when traditionally passive investors suddenly side with an
insurgent hedge fund pressing management for change.
But now, an unlikely alliance of investors, board members and
advisers has formed in an effort to counter the disproportionate influence
of activist hedge funds on corporate America.
The group, calling itself the Shareholder-Director Exchange,
wants to provide companies, boards and investors with the self-help tools
they need to avoid sudden blowups, soothing these sometimes strained
The exchange is made up of representatives from big investors
BlackRock and Vanguard; board members
from companies including
Coca-Cola and Hertz; and corporate
advisers from the law firm Cadwalader, Wickersham & Taft, who typically
defend against activists rather than work for them.
The group began discussions last year to try to develop
a protocol for institutional investors
and board members to follow when either side wants to talk to the other.
Activists were not part of the working group that developed
the protocol, however.
Still, when the endeavor is announced on Monday, the
participants hope it will provide a template for healthy relations between
investors and directors around the country.
“There’s an unfortunate gap in dialogue that has developed,”
said James C. Woolery, the chairman-elect of Cadwalader, who conceived of
the Shareholder-Director Exchange and oversaw its development. “Shareholders
and the boards that serve them need to be closer, they need to be more
integrated, and there need to be real relationships.”
Under the protocol, which is a voluntary set of standards
that companies and investors can adopt, boards will be encouraged to meet
with longtime shareholders to discuss issues of corporate governance,
management performance and deal activity, as needed.
The purpose is not for board members and shareholders to
discuss operations, financial results or return-of-capital plans — topics
that are more appropriate for management. This should keep companies from
falling afoul of the
Securities and Exchange Commission’s
fair disclosure regulations, which require that material nonpublic
information is made available to all investors at the same time.
“For many things — financial results, the strategy, how
execution is going, return-of-capital programs — it really is the purview of
management to talk to shareholders,” said Linda Fayne Levinson, a director
at Hertz and
Western Union, among other companies,
who was part of the group that developed the protocol.
But for corporate governance issues, management changes and
long-term plans, the group recommends that boards and investors get together
“When shareholders want to talk to directors, it’s because
they hate the pay program, they don’t like the C.E.O. or they want to know
how directors are thinking about other governance issues, such as
destaggering the board,” Ms. Levinson said.
The protocol states that when either a company or an investor
wants to engage with the other, they will approach designated contacts, like
a corporate secretary, and request a meeting. The other party will
acknowledge the request as soon as possible, and agree to meet within 20
When the sides do meet, the goal is to create an environment
where frank discussions can occur. The protocol calls for the independent
nonexecutive chairman or other lead directors to attend, and for senior
members of the institutional investment group to participate.
Management, lawyers and bankers are discouraged from
attending the meetings.
The protocol suggests that meetings be between a company and
one investor, but it allows for flexibility, so that several investors could
approach directors about similar concerns. It also suggests that
shareholders might attend board committee meetings or strategy retreats, or
special investor days.
Once both parties air their grievances, the boards and
investors are encouraged to commit to next steps resulting from the meeting,
and to share the information about the engagement with other board members,
management and other investor colleagues.
Though companies need not commit to specific changes for the
meeting to be deemed a success, “an important element of engagement is each
party’s willingness to listen carefully to one another and to take action in
response to valid concerns,” the protocol states.
“These meetings have to have a purpose,” said Michelle Edkins,
global head of corporate governance at BlackRock and a member of the group
that developed the Shareholder-Director Exchange. “It isn’t just about
everyone getting to know one another.”
The protocol has been developed as activist investors have
upended relations between companies and institutional investors in recent
years. Led by brash investors like William A. Ackman, Daniel S. Loeb and
Carl C. Icahn, activists are pouncing
on underperforming companies, demanding management and board changes,
return-of-capital programs, and even spinoffs and disposals.
Increasingly, activists are enlisting the support of
institutional shareholders, who often feel disconnected from a company’s
board and management because dialogue is rare.
“When Carl Icahn shows up in
Apple and sends a tweet, Apple stock
goes into turmoil,” said Declan Kelly, chief executive of Teneo, a
consulting firm that helped organize the exchange. “That means shareholders
are disconnected enough from the board’s message that they are responding to
a 140-character message and not trusting Apple’s directors. It’s not healthy
for the financial system.”
Because of activists’ willingness to broadcast their opinions
about companies in their cross hairs — over
Twitter, on CNBC and in public letters
— they are often granted unusual access to management and directors. Mr.
Icahn, for example, recently had Apple’s chief executive,
Timothy D. Cook, over to his Manhattan
apartment for dinner. Many companies, by contrast, speak to their largest
shareholders a couple of times a year.
The Shareholder-Director Exchange protocol is intended to
establish more open lines of communication between companies and
institutional investors, allowing companies to get their message out, and
investors to express concerns, more frequently.
So far, the project is little more than an idea. But
executives at big shareholders like BlackRock, Vanguard, Calvert
Investments, State Street Global Advisors, and directors at big companies
such as Yum Brands,
Archer Daniels Midland and Six Flags
Entertainment, are all committing to doing business this way. “It’s long
been thought that talking to shareholders is only the C.E.O.’s job,” Ms.
Levinson said. “We’re trying to open it up a little bit.”
version of this article appears in print on 02/03/2014, on page B2 of the
NewYork edition with the headline: Unlikely Allies Seek to Check Power of
Activist Hedge Funds.
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