Stock market volatility and a slow economic recovery have led to the emergence of a new generation of activists. Some shareholders are focused on corporate governance issues such as increased transparency while others are dissident and interested in major changes.
Say on Pay
New regulation such as Dodd-Frank Wall Street Reform has provided investors with a voice at the annual meeting. Signed into law in July 2010, Dodd-Frank enables shareholders to vote to approve the compensation of senior executives.
Many investors believe that there’s a disconnect between pay & performance – high CEO pay despite underperforming stocks. Not surprisingly, executive compensation and board-related issues, including withholding votes for Directors who are members of executive compensation committees, are the top concerns of shareholders. Other corporate governance issues include too much control and limited accountability.
Here are the key trends in say on pay:
- According to data from Georgeson, for companies in the S&P 1500, there were 240 corporate governance proposals voted on in 2011, down from 342 in 2010 and 371 in 2009. Although very few shareholder proposals have passed, there have been a surprising number of votes against companies. The majority vote passes but 75% is considered a success.
- In 2011, 157 companies failed to garner 70% of shareholder support.
- According to our Thomson Reuters Asset4 data, Microsoft topped the global list of companies ranked highest for their corporate governance initiatives in 2011. Other companies recognized for their efforts included: Standard Life, Lend Lease Group, Procter & Gamble, Kraft Foods, ConAgra Foods and Duke Energy.
We expect that say on pay issues will remain in the forefront this year. A bearish market with low valuations coupled with decreased tolerance for even short-periods of underperformance or perceived poor management can help foster an environment for activism, particularly in the U.S. and Canada.
Trends in Activism
Turning to activism, although shareholders don’t run a company, they can exercise their rights as owners and influence the board of directors and management. There are two primary types of activists, those interested in governance matters (calSTRS) who tend to be long-term oriented and those who are decidedly more hostile & aggressive in their tactics to increase shareholder value (Icahn, Relational).
According to our Thomson ONE data, in 2011, there were nearly 300 instances of shareholder activism with board representation. A seat on the board was at the top of activist demands. This demand has not changed thus far, in 2012, where there have been 16 instances of activism.
Top Factors that Attract Activists
Why do companies attract activist investors? Here are a few reasons we’ve derived from our data:
- Undervalued companies – low P/E multiples vs. peers
- Companies going through a major change: CEO/crisis/restructuring
- Controversial CEO – High compensation, outspoken/aggressive comments
- Underperformance – Multiple quarters of missed guidance
- History of accounting irregularities/governance issues
- High levels of cash/assets that can be easily monetized
- Declining investor sentiment
Managing activist risk: Tips for IR officers
As shareholder activism and say on pay continue to be an on-going reality for many investor relations teams, here are recommendations for managing your activist risk:
- Understand investor and activist concerns
- Know your shareholder base and gather feedback
Take action – if your received less than 75% of votes, reach out to investors and understand their concerns to avoid a repeat
For more information, please contact Lou Cordone at lou.cordone@thomsonreuters.com or Arzu Cevik at arzu.cevik@thomsonreuters.com. Also watch our webinar on the topic.
Share your experience and best practices in managing activists or say on pay.
Read Full Post »
Thomson Reuters IRHub Blog 