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Growing use of "Say on Pay" voting data to analyze activist vulnerability


The article below from The Deal, which has been a private subscription service of Euromoney Institutional Investor PLC since the beginning of 2019, is provided to Forum participants with permission of the editor.

For previous Forum attention to the use of "Say on Pay" voting data, including its applications for the activist vulnerability analyses reported below, see the Shareholder Support Rankings ("SSR") project website:


Source: The Deal, July 10, 2020


Ronald Orol, Senior Editor


Negative Say-On-Pay Votes Signal ‘Blood in the Water’ for Activists

Large negative votes on executive pay and incumbent directors in uncontested elections may attract insurgent hedge funds hoping to find companies with large disgruntled shareholder bases.

By Ronald Orol

Updated on July 10, 2020, 03:53 PM ET


In 2018, Bed Bath & Beyond Inc. (BBBY) received the support of only 21% of voting shares for its executive compensation, down from an already troubling 44% of support in 2017.

By March 2019, a trio of activists — Legion Partners Asset Management LLCAncora Advisors LLC and Macellum Advisors GP — emerged on the scene with a campaign to replace the entire 12-person board of the embattled retailer. 

The company had other characteristics of a business an activist could focus its attention on. In particular, the company had lost about 20% of its value in the year leading up to the effort and 77% over the previous four years, while there remained potential value hidden amongst a hodgepodge of smaller retail assets. 

However, the big negative vote was likely a big contributing factor to the activists’ campaign, which ultimately led to the ouster the company's CEO and major changes to the board’s makeup.

Bed Bath & Beyond isn't alone in being targeted by an activist after receiving a big negative vote on pay.

And while votes on both executive pay and directors in uncontested elections are generally nonbinding, the votes can be embarrassing — especially as companies struggle to deal with the fallout from the coronavirus pandemic. The votes can attract an activist hedge fund hoping to find companies with a large disgruntled shareholder base. 

"When shareholders have shown they are willing to vote against management or directors, that may lead activists to believe shareholders will be receptive to their message," said James Langston, partner at Cleary Gottlieb Steen & Hamilton LLP. "One of the levers activists have is the proxy contest and trying to convince shareholders to vote out the board."

Langston noted that discontent among shareholders could encourage an activist investor who might be looking at it and some other target candidates.

Lawrence Elbaum, partner and co-head of shareholder activism at Vinson & Elkins LLP, added that activists who already have companies on their radar as possible campaign targets always look for additional signs of shareholder discontent. 

“A sizable vote against directors or against executive compensation could be what they are seeking to bolster their campaigns. It can be blood in the water for activists,” he said.  

As the 2020 proxy season comes to a close, some companies with big negative votes might want to keep a close eye out for potential activists.

According to consulting firm Semler Brossy, in 2020 some 45 U.S. companies tallied more than 50% votes against their respective executive pay packages as of July 2. In addition, the firm found one or more directors at 815 companies over the same time received a negative vote of 20% or worse, while 41 directors at 31 companies received more than 50% negative votes.


For example, in mid-May, CVS Health Corp. (CVS) CEO Larry Merlo received an overwhelming negative vote of 76% of shares opposing his pay package. In March, Qualcomm Inc. (QCOM) CEO Steve Mollenkopf got a similarly large protest vote of 82% against his pay package.

At the same time one or more directors on boards of a wide variety of companies, including Netflix Inc. (NFLX), Boeing Co. (BA), Bunge Ltd. (BG) and Nabor Industries Ltd. (NBR), received large negative votes in uncontested elections. At Netflix, for example, CEO Reed Hastings received a 33% negative vote.

It is not uncommon for large negative votes on CEO pay to be coupled with negative votes on directors. For example, about 41% of votes opposed Bunge’s executive compensation. In addition, directors Vinita Bali and Andrew Ferrier received 41% and 25% negative votes on their elections, respectively.

Activists will often try to identify the source of the negative votes in the company’s shareholder base. Sometimes a negative vote on CEO pay has broader implications beyond concerns about remuneration. 

Insurgent investors may look to voting recommendation reports issued by proxy advisers Institutional Shareholder Services Inc. or Glass Lewis & Co. LLC.

“They [activists] will seek out the source of the negative vote, maybe by picking up ISS and Glass Lewis reports to review whether these proxy advisers had an issue with the company’s board or executive pay,” Elbaum said.  

In addition, activists examine CEO pay as it relates to the company's total shareholder returns, including capital distributions. 

"If an activist believes that pay is not aligned with performance at a company with investor opposition to the pay package, it could be because there has been some underperformance and that increases the prospects an activist will launch a campaign," Cleary's Langston said.

He added that a negative say-on-pay isn't necessarily a problem on its own but could be "the tip of the iceberg" in terms of issues at the business.

"The vote could point to larger problems at the company that the activist could focus on," he said. "An activist might believe the company is more vulnerable than they had originally thought."

Some big negative pay votes have emerged at companies that have been targeted by activist hedge fund-type investors in the past. For example, only 16% of USA Technologies Inc. (USAT) shares supported executive pay packages at a meeting that occurred a few days after Douglas Braunstein’s activist fund, Hudson Executive Capital LP, took control of the board in a settlement.

Also, only 42% of votes supported CEO pay at Tom Barrack’s Colony Capital Inc. (CLNY) in 2020. The company had already been targeted with a proxy contest by Jason Aintabi’s Blackwells Capital LLC. Aintabi settled with Colony after the company announced that it was accelerating Barrack’s resignation. (Barrack resigned from the CEO role on July 1.)

In other cases, such as at Bed Bath & Beyond, activists emerged after a big negative pay vote.

For example, in 2018, about 23% of shares voted against drug company Progenics Pharmaceuticals Inc. CEO Mark Baker in an uncontested election. In 2019, two Progenics directors, Peter Crowley and Michael Kishbauch, received majority negative votes in an uncontested election. Shortly after that, activist fund Velan Capital launched a written consent solicitation board fight, which does not need to wait for an annual meeting,  to successfully unseat Baker and two others from the company’s board. This year, Progenics merged with Lantheus Medical Imaging Inc. (LNTH) in a deal that closed in June.

Chipotle Mexican Grill Inc. (CMG) is one of the highest-profile examples of a big negative vote on pay that drove an activist into the fold.

In 2014, only 23% of shares backed Chipotle’s executive compensation package. The Mexican-themed fast-food chain at the time had co-CEOs, a rare situation that typically is a red flag for investors. By 2016 — when investor sentiment around executive pay was still not great — Bill Ackman’s Pershing Square Capital Management LP swooped in with a campaign and ultimately a settlement to add dissident directors.

Elbaum noted that companies that wait too long to examine the root cause of negative shareholder votes could soon be targeted by activists, who often will try to paint boards as tone deaf to shareholder feedback. 

“Companies and their boards should see these negative votes as valuable opportunities, well before the next proxy season, to drill down on and proactively incorporate recent shareholder feedback,” he said.



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