You don’t need to be a weatherman (or a hedge fund’s star trader, a corporate board member, a securities lawyer…) to know at least a couple of things about the governance of public corporations in the 21st century. Specifically: activist shareholders have attained an unprecedented level of importance, often crashing the once-sedate garden parties of corporate board deliberations. Second, the institutional context in which they can do this has been molded and will be remolded some number of times in the near future by changes (technological, legal, and even sociological) in the way in which equity is traded in and outside of the stock exchanges of the developed world.,
Last year a conference board white paper tried to do the work of meteorology, tried that is to figure out exactly where the winds are blowing and what sort of balance the parties in the corporate governance picture may in time adopt in the face of the storm.
Yes, we like to think that the news moves fast in these matters, and perhaps any review of a report with the year ‘2014’ stamped on it in the midst of 2015 seems odd. But maybe it doesn’t move all that fast. After all, each of the concerns of this report are with us still. Further, what is most worth a look here is not any conclusion of board drew, but its very failure to draw any. The willingness of greybeards to throw up their hands hasn’t changed in the last year!
One of the universals in this sort of report is a distinction among the different sorts of “activist.” The term is probably most often employed in the mass media to refer to gadfly activists using shareholder meetings to push for items on a social/political agenda, demanding for example that companies stop doing business with the government of various pariah countries abroad, or report explicitly their dependence on the use of carbon-based fuels. A table in the white paper shows that such ‘traditional activist’ issues have seen increased levels of average support in the years since 2009.
Source: Conference Board Governance Center White Paper, “What is the Optimal Balance in the Relative Roles of Management, Directors, and Investors in the Governance of Public Corporations?” 2014
But the development of “more aggressive forms of shareholder pressure,” the forms associated with alpha seekers in the hedge fund or private equity context, is a newer trend and complicates the meteorology considerably. Of the 35 proxy contests waged against the management of Russell 3000 companies in the 2013 proxy season, 69% came about due to the initiative of activist hedge funds. One third of the contests waged by such hedge funds sought to gain full control of the board.
Improving Effectiveness … Or Not
The conference board asked itself several germane questions. Two of these focused on changes in voting mechanics. On the positive side, the board wanted to know whether changes in such mechanics might improve the effectiveness of corporate governance. On the negative side, it concerned itself with “what new challenges are presented by vote decoupling, high-speed trading, and hyper portfolio diversification?”
There are three respects in which the mechanics might improve effectiveness: ensuring that votes are accurately counted; enabling companies to keep track of who actually owns the stock at a given moment; and coping with the consequences of the SEC’s current shareholder communications rules.
The13F filings made by institutional investors should help companies understand who owns their equity. But these filings are “of limited utility to companies during the proxy season” for several reasons. Timing is one of them, for example, a Form 13F filer that acquires securities on the 1st day of January won’t have to disclose the ownership of those securities on a Form 13F until May 15, which will very likely be too late for the company to make use of that information in engaging with that investor.
The white paper presumes that the mechanics should be reformed to make engagement easier, but offers littler more than pessimism about any real change.
On the issue of the way in which changes are undermining effectiveness, too, the white paper seems rather bleak. If you’re scratching your head about the reference to “hyper” diversification in the quotation above, that seems to have become the preferred term in some quarters for indexing and other more-or-less passive strategies reflecting efficient market theory. The conference board doesn’t want to use the term “passive” investing because … well, it may not be all that passive. “Many of the largest managers of indexed funds are in fact very active participants in share voting.”
At the end, though, the distinguished authors of this report throw up their hands and say, in effect although not exactly in these words, “It is all too complicated for us, we have no specific reforms to offer, but we think reform is necessary, and hope it all works out somehow.”
If the problem is the way the winds are blowing, then the first take on the solution might be this: find the lee side of a secure structure, and enjoy the atmospheric tranquility that provides.
The problem, though, is that the secure structures keep getting blown away.