May 3, 2011, 5:16 pm
Quiet Proxy Season
Means Fewer Fights in the Boardroom
STEVEN M. DAVIDOFF
Proxy season is a bust.
Shareholder activism intended to spur change in the boardroom is down
significantly so far this year. At the same time, activism by hedge funds to
oppose takeover transactions is rising. It appears that hedge funds prefer
to battle takeover titans rather than fight for corporate governance issues.
If this trend holds, it could change the way corporate America operates.
Proxy season appeared to get a fast start in the fall. Back then, the
prominent activist hedge fund Pershing Square Capital Management announced
that it had taken sizable positions in
J. C. Penney and Fortune Brands.
These announcements heralded another contentious proxy season. It didn’t
Instead, as the proxy advisory firm Institutional Shareholder Services
noted in a research note last week, only four efforts by hedge funds to
replace directors have come to a vote in the first four months of the year.
This increased to five on Friday, when Mario Gabelli’s Gamco Management lost
a proxy contest to place two directors on
Myers Industries’ board.
According to Factset Sharkrepellent, we typically see about eight such
votes by the end of April. The lower numbers reflect a reduction in hedge
funds willing to start a proxy contest to replace directors. Last year there
were 18 proxy contests through April, but this year there were only 10.
And some of these fights are leading to quick settlements. Of the 10
proxy contests that were to be voted on since the beginning of this year,
five have been settled, three went to a vote with the dissident winning in
two, and two were withdrawn. The Pershing Square investments never even came
to a proxy fight: J. C. Penney and Fortune Brands quickly reached
understandings with the hedge fund.
These trends are mirrored in the entire season’s figures. According to
Factset Sharkrepellent, only 44 proxy fights have been announced as of April
27. At this point in 2009 there were 82 such announcements.
Because companies increasingly require that notice of a proxy contest be
given further in advance, it is unlikely that any more proxy contests will
be announced this season. There will certainly not be the kinds of battles
we have seen in the past years, like those involving
Barnes & Noble,
CSX and Target.
The only action in proxy season thus far this year appears to be “say on
pay.” These are recently enacted
Securities and Exchange Commission rules requiring a nonbinding
shareholder vote on compensation. The law firm Schulte Roth & Zabel reports
that in the first 30 days of these rules being in effect, compensation
proposals were approved at 93 of 95 companies.
And the corporate governance activist Lucian A. Bebchuk at
Harvard Law School and his American Corporate Governance Institute have
continued to push for boards to hold annual elections of directors instead
of electing directors in one-third tranches each year, making them harder to
But these are minor currents in what has been a general decline in
corporate governance activism.
The takeover activism market is hot, though. Last year, according to
Factset Sharkrepellent, 4.6 percent of takeovers faced some type of
shareholder activism. In the first four months of this year, the rate has
more than doubled to almost 10 percent. This is up from about 3 percent of
deals in 2005.
A variety of factors appear to be coming together to explain the decline
in shareholder corporate governance activism.
The stock market is in bull territory and valuations are rich, meaning
fewer easy targets. Yet the economic outlook remains uncertain, so people
are unwilling to take the high risks associated with a proxy contest.
There also appears to be a flow of money out of this sector and into
other areas with greater potential for returns. There is not only less money
but fewer funds participating in the wake of the financial crisis. Some
flame-outs, like Pershing Square’s loss on Target, which at one point
approached almost $2 billion, have also highlighted the downside to this
type of investing.
Companies themselves are also much less willing to engage in proxy
contests. These are very costly, and in a financially volatile environment
companies do not want to spend the tens of millions of dollars that a proxy
contest costs. They are willing to negotiate, meaning settlements and
compromise rather than fights.
The surge in merger-and-acquisition activism highlights these factors.
Merger arbitrage funds, which speculate on the outcome of takeover
transactions, are performing much better and have greater cash inflows than
shareholder activist funds. BarclayHedge reports that there was a
substantial net inflow of $4.5 billion into arbitrage funds in 2010, with
their net assets going to $31.4 billion from $26.9 billion.
The presence of more arbitragers and money creates a self-fulfilling
effect. It means more participants to influence a takeover contest.
Unlike shareholder activism, which requires hard work even if you win a
proxy contest, merger activism has quick results. This feeds into the
primary reason for the surge in takeover activism. Deal agitation has proved
to be the most direct and fastest route to activist results over the last
few years. It is much cheaper than corporate governance activism.
The decline of activism is partly cyclical. Proxy contests ebb and flow
with the economy and market sentiment. We are in a down cycle right now, but
if the economy and stock market remain stable, we are likely to enter
another up cycle.
There is also a realization that this is really hard work and that the
outcomes are less certain. The hedge fund T.C.I., for example, has left this
sector since its disastrous foray trying to elect directors at CSX, which
resulted in a loss of more than $250 million. In its note, I.S.S. observed a
lack of “second growth” activists. This may be a permanent trend and hinder
the recovery of corporate governance hedge funds.
There is a vibrant debate over whether corporate governance activism
helps or harms corporate America. Those who attack this type of activity
claim that it encourages short-termism. Companies will take short-term
measures to bolster their share prices in response to activists, and
activists themselves are only in it for the short-term lift, not the
long-term health of the company.
Others believe that activism serves as an enforcement mechanism, namely
that it forces poorly performing management to be more disciplined. The
downturn in activism is thus a real loss if it becomes permanent. The reason
is not only because of the disciplining effect this activity brings to the
target company, but also because of the general fear these activists
inspire. No doubt, corporate America is much more focused on its shareholder
base and its operations than it was 10 years ago, in part because of these
The downturn in this activity is therefore troubling, but there is an
upside: takeovers are about to get more interesting.
Steven M. Davidoff, writing as The Deal Professor, is a
commentator for DealBook on the world of mergers and acquisitions.
The New York Times Company