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Oct 30, 2013

Value of shareholder activism debated at Georgetown-Financial Times forum

Misaligned objectives of activist directors can create ‘weird dynamic in the boardroom,’ says one investment manager

There aren’t enough appropriate activist targets to justify the proliferation of activist funds in recent years, Barry Rosenstein, founder and managing partner of JANA Partners, asserted at a forum held in New York City on October 30.

Rosenstein joined leaders from TIAA-Cref, GAMCO Investors, Goldman Sachs and ISS on Wednesday night to debate issues like whether shareholder activism has gone too far or not far enough and the influence of proxy advisory firms, in a panel discussion hosted by the Georgetown Center for Financial Markets and Policy, located in Georgetown University’s McDonough School of Business, and the Financial Times.  

‘I see too many activist-only funds that raise money purely for activist campaigns,’ said Rosenstein, whose hedge fund has pursued 60 activist targets since its founding in 2001 and won just a single proxy fight.

JANA Partners prefers to wait for an appropriate event that merits an activist push and to work with management behind the scenes to effect changes in a company’s structure or business strategy, he added.     

In a keynote address that kicked off the evening, SEC commissioner Daniel Gallagher reiterated what has become something of a stump speech about the need for the SEC to consider regulating proxy advisory firms and making sure that investment advisers are not ignoring their fiduciary duties by relying on proxy advisers’ recommendations when voting proxies on behalf of beneficial shareholders. Gallagher suggests that proxy advisers be required to follow a universal code of conduct, become more transparent on how they operate and increase overall accountability for their recommendations.

Responding to criticism of proxy advisers’ level of influence raised by Gallagher, who didn’t stay for the panel discussion, Gary Retelny, president of ISS, said he sees ‘institutional investors becoming much more comfortable making up their own minds and having their own [proxy] voting policies’ than they were 20 years ago.

Rather than blindly accepting proxy advisers’ voting recommendations, Retelny said, institutional investors rely on the data and analytical framework ISS provides to help them make their own voting decisions on proxy items. And larger investment firms are increasingly asking ISS to do customized analysis informed by those investors’ own investment guidelines. A key service that ISS provides, he added, is its IT platform on which institutional investors can register their votes.

Part of the debate about activist investors centered on paying activist directors a premium to serve on boards. Rosenstein acknowledged that his firm underwrites the cost of adding an activist director to a target company’s board, including paying him an upfront fee. But he explained that ‘we like to bring in very talented people who don’t need to do this,’ adding that the best operators have no reason to join a board without a financial incentive. 

Paying an activist director more to get the stock price up a certain percentage within two years when his fellow board members are not being paid to do so ‘creates a weird dynamic in the boardroom,’ said Bill Anderson, managing director, M&A Group, Goldman Sachs.

That misalignment of performance objectives among board members is no different from when non-activist directors receive, as part of their compensation, shares that vest in different time periods, Rosenstein retorted.

Among major changes in corporate governance that Stephen Brown, senior director, corporate governance, TIAA-CREF, notes in recent years is that institutional investors are having more conversations with each other as permitted under SEC rules.

‘We have a triage approach to finding outliers for governance [to target companies for activism], but we miss a lot,’ he said. ‘So we appreciate hearing from other institutional investors about outliers [we may not be aware of].’

Most of the egregious governance outlier practices are gone, including the failure to link executive compensation to the company’s financial performance, Brown says. But European institutional investors are more insistent than their American counterparts about talking to directors about their concerns and boards of global companies will have to learn to make time for such discussions, he added.

David Bogoslaw

Associate Editor and Online features producer for Corporate Secretary