Report Includes 6 Interviews with 2019 Corporate Governance Forum Speakers
- Bob Marese, Managing Director, Mackenzie Partners
- Lyndon Park, Managing Director and Head of Corporate Governance Solutions, ICR
- Lawrence Elbaum, Partner and Co-Head of Activism Defense, Vinson & Elkins LLP
- Harry Cendrowski, Managing Director, Cendrowski Corporate Advisors
- Kellie Huennekens, Head of Americas, Nasdaq Center for Corporate Governance
- Daniel Laddin, Founding Partner, Compensation Advisory Partners
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How can diversity remain important to corporate boards as other priorities occupy so much time? What’s the best way to narrow the gender pay gap among executives? What’s the smartest approach to announcing an M&A transaction? These were some of the questions addressed by board directors, senior executives, institutional investors, investment bankers, attorneys, and other advisors the 2019 Corporate Governance Forum in New York City, hosted by Nasdaq, Inc., ICR Inc., and CorpGov.
Among the key speakers was Martin Lipton, Founding Partner of Wachtell, Lipton, Rosen, & Katz. In a fireside chat with CorpGov Editor-in-Chief John Jannarone, Mr. Lipton argued that corporations had lost sight of their original purpose: to benefit all stakeholders such as employees and members of the local community rather than simply shareholders. Such a progressive approach to governance, which he calls “The New Paradigm” and has discussed with CorpGov in the past, is part of Mr. Lipton’s mission to replace activism with a more cooperative framework led by the likes of Vanguard, Blackrock, Inc. and State Street Corporation.
Representatives of such large institutional investors also participated as panelists at the Forum. They included Ray Cameron, Head of Investment Stewardship for the Americas at Blackrock, Hillary Flynn, Managing Director and ESG Analyst at Wellington Management Company LLP, Marc Lindsay, Head of Portfolio Company Engagement, Analysis and Voting at Vanguard, and Jake Walko, Vice President, ESG Investing at Neuberger Berman.
“In just one afternoon, the Corporate Governance Forum brought together the leaders in governance across the spectrum: from CEOs to law firm partners to activist investors to large asset managers to advisory practice chiefs,” said Nick Mazing, Director of Research at the financial research platform Sentieo, who attended the event. “Unlike financial information, which is heavily standardized, important ESG information is still not: This creates challenges in collection, ranking, and implementation. It was great to hear how the large active and passive managers, including the two largest, Vanguard and Blackrock, are addressing the problem.”
(From left: John Quigley, Founder & Managing Partner, Kewco, LLC, Hillary Flynn, Managing Director and ESG Analyst, Wellington Management Company, Jake Walko, Vice President, ESG Investing, Neuberger Berman, and Chris Anselmo, Head of Financial Advisory Services at Nasdaq)
Investors known to engage directly – in some cases aggressively – with senior management and boards were also among the speakers. They included Wall Street veteran Cliff Robbins, Founder and CEO of Blue Harbour Group, L.P., Quentin Koffey, Partner at Senator Investment Group, and Daniel Beltzman, Managing Partner, Birch Run Capital and board director at Regis Corp.
Other board directors included Susan Salka, who is President and CEO of AMN Healthcare Services Inc. and on the board of McKesson Corporation. The banking industry was represented by Amy Lissauer, Global Head of M&A-Activist and Raid-Defense Advisory at Bank of America Corporation and Shelley Dropkin, Deputy Corporate Secretary and General Counsel, Corporate Governance at Citigroup, Inc.
The pages that follow include interviews with six speakers at the 2019 Corporate Governance Forum who reflect on highlights from the event.
Daniel Laddin, Founding Partner, Compensation Advisory Partners
While companies have become smarter about designing appropriate compensation structures, activist criticism of executive pay is likely to persist. That’s according to Daniel Laddin, Founding Partner of Compensation Advisory Partners. In an interview following the 2019 Corporate Governance Forum, Mr. Laddin also said that the best compensation models begin with a company’s own business strategy and shouldn’t necessarily mirror structures their peers have adopted. Additionally, he said some companies should consider introducing directors who can best relate to their customers – perhaps even selecting members from a variety of socioeconomic backgrounds. He also said that while a pay gap remains between genders, a recent trend of greater disclosure around the issue has put pressure on companies to act. The full interview is below:
CorpGov: To what extent have activists criticized compensation recently and do you see that changing?
Mr. Laddin: We often see activists use executive compensation as a focal point for criticizing a company’s board of directors and overall governance. Given many companies have gotten rid of the more “offensive practices” (e.g. large severance payouts for failure, excessive retirement provisions) activists usually focus on the disconnect between company performance and the pay delivered to executives. I do not see this changing much over time. Compensation will always be a good talking point for activists as it resonates with investors. We have seen cases where the criticism of compensation programs is warranted and others where it is just used to get attention; it is important for investors to do draw their own conclusions.
CorpGov: Do you believe companies have become smarter about designing appropriate compensation structures?
Mr. Laddin: I do believe companies have gotten smarter about designing compensation structures that best meet their business needs. When Say on Pay first went into effect, we saw a very quick migration to compensation programs that were heavily influenced by the proxy advisors. That model included reduced use of stock options, limited restricted stock and at least half of the long-term incentive being in performance-contingent equity with a heavy emphasis on relative Total Shareholder Return.
While this model can work, the best compensation models start with the business strategy, not with what everyone else is doing. Over time, companies have started to tailor their programs more to meet the business reality they face. This may mean for growth companies a higher emphasis on stock options than before or for companies in transition a greater emphasis on cash or restricted stock. The key question management and boards need to ask is what approach is best for us given our business, the competitive landscape and our culture.
CorpGov: When it comes to board diversity, how do you feel about the idea of having people from different economic backgrounds on boards?
Mr. Laddin: I think this a very interesting question. Because of the traditional pipelines used to recruit outside Directors and a focus on direct experience, there has been a focus on current or former senior executives, which leads to directors who have a similar economic situation. If a business focuses on a diverse customer base, having a director who can bring that perspective along with other expertise can be very valuable.
CorpGov: There has been much discussion of finding younger members for corporate boards. Is there a limit on how young directors should be?
Mr. Laddin: I don’t think there should be a hard-wired minimum age for a director. That being said, with the typical board being comprised of under 10 directors, you need each director to bring a multitude of skills and expertise if they are going to contribute. Some of this expertise typically develops over time, so there may be a practical reality to how young a director can be in order to contribute on par with other more experienced directors
CorpGov: Is there still a gap in compensation between men and women and are companies providing more disclosure on the topic?
The pay gap does still exist. The good news is, this topic is making its way to the board room in a very meaningful way. Compensation Committees in particular are probing this question to understand where a company stands related to pay equity and holding management accountable for addressing any issues. We are seeing some companies provide additional disclosure on the pay gap and shareholders are also pushing some companies to disclose more. The SEC is also looking at whether disclosure around Human Capital should be enhanced. All these forces are pressuring companies to address the pay gap.
Dan Laddin is a founding partner of Compensation Advisory Partners LLC (CAP) in New York. He consults with boards and management in all areas of executive compensation, including annual and long-term incentive design, performance measurement, target setting, and regulatory/compliance issues, as well as outside director compensation programs. Mr. Laddin works closely with Committees to ensure strong governance of their executive compensation programs to drive performance and align with shareholders. Mr. Laddin’s background in finance and accounting serve him well in making sure that compensation programs align with the client’s strategy and financial objectives.
Mr. Laddin has over 15 years of experience working with both private and public companies across industries with a focus in consumer brands, media and manufacturing. He was named to the National Association of Corporate Director’s Directorship 100 for his contribution and influence in boardrooms. Mr. Laddin teaches executive compensation through WorldatWork and is a regular speaker on executive compensation. He is regularly quoted in leading publications of the business press. Prior to joining CAP, he was a principal in Mercer’s Human Capital business. Mr. Laddin joined Mercer through the acquisition of SCA Consulting in 2001. Prior to that, Mr. Laddin was a CPA and worked as an auditor in KPMG’s business assurance practice. He also worked at David Berdon & Company where he provided both audit and tax services to clients. Mr. Laddin received his MBA from the University of Chicago Graduate School of Business and graduated magna cum laude from the University of Albany with a BS in Accounting.
Kellie Huennekens, Head of the Nasdaq Center for Corporate Governance for the Americas
Kellie Huennekens, who leads the Nasdaq Center for Corporate Governance for the Americas, participated in a panel entitled “Corporate Culture & Diversity/Human Capital Management: Board Responsibility?” She explains that it’s very possible to choose directors who are both diverse and have board-relevant business experience. For instance, a Nasdaq study found that more female directors had cybersecurity or technology experience than male directors. Similarly, more young directors had experience in those fields than their older counterparts. The full interview is below:
CorpGov: What’s one question that stood out for you?
Our panel opened with the observation that time is a precious commodity and topics such as ESG, cybersecurity and other enterprise risk management topics have been taking on an ever-growing share of board level attention. The question following this observation was: “How can boards continue the drive for increased diversity and prevent this priority from plateauing?”
It’s thought-provoking.
Why is diversity framed as an “either/or” concept? Because – to borrow insight from Nasdaq’s CEO Adena Friedman – the answer is “and.” Yes, you can have board relevant, business relevant expertise *and* diversity.
Our research team at the Nasdaq Center for Corporate Governance found that for the directors at S&P 100 companies charged with cybersecurity oversight, half of the women directors had cybersecurity or technology expertise compared to just one-third of their male counterparts. Our research team also found that, while directors under 50 represented the smallest age group at less than 5%, a majority – over 60% — had cyber or technology expertise. In comparison, this figure was around 20% of directors aged 70 and over.
You really can have both. As a fellow panelist stated, what it takes is a thoughtful, deliberate process.
CorpGov: What’s one response that stood out?
The panel – and more broadly, the Governance Forum – brought together a unique mix of stakeholders to discuss some of the major governance topics of the day. What emerged were some interesting differences in perspectives and experiences.
For me, what stood out most in terms of responses was the chance to share experiences on innovations and leading-edge work that’s being done company by company. For example, Citigroup has created a board level Ethics and Culture Committee which oversees management’s efforts to foster a culture of ethics across the firm, as well as the firm’s leadership in tackling median gender pay. The different ways that companies are assessing corporate culture and connecting culture and human capital management to compensation strategies. How companies are working to develop ways to measure and monitor corporate culture. There is a lot of activity in this space.
Ms. Huennekens leads the Nasdaq Center for Corporate Governance for the Americas region, which aims to advance the understanding and evolution of corporate governance in the public and private markets through research, thought leadership and stakeholder engagement. Kellie advises boards and management teams on corporate governance and environmental and social matters, with a focus on corporate practices including emerging best practices. Ms. Huennekens, who works with corporate boards and various governance organizations, serves on the Advisory Board of the Weinberg Center for Corporate Governance, and is an officer of the Middle Atlantic chapter of the Society for Corporate Governance. Previously, she served on the Council of Institutional Investors’ Markets Advisory Council.
Prior to joining Nasdaq, Ms. Huennekens helped establish the EY Center for Board Matters, where she supported corporate boards and other governance stakeholders. She was responsible for the creation of thought leadership, benchmarking tools and custom client products. Ms. Huennekens started her corporate governance career in 2005, when she joined Proxy Governance Inc. She previously worked in investment banking and corporate finance. Ms. Huennekens holds an MBA from the University of Maryland and a BA from the College of William and Mary.
Harry Cendrowski, Founding Member and Managing Director of Cendrowski Corporate Advisors
Diversity should include not only people of different sexes and ethnic backgrounds, but also a broader mix of operating experience that can be valuable at the board level. That’s according to Harry Cendrowski, Founding Member and Managing Director of Cendrowski Corporate Advisors who moderated a panel entitled “Corporate Culture & Diversity/Human Capital Management: Board Responsibility?” Mr. Cendrowski added that more efforts should be made to teach potential directors how to do their job better, rather than having them start cold. Potential solutions include incubator programs or even board roles at private companies that can prepare directors for more significant positions later on. The complete interview is below:
CorpGov: We all know the most precious commodity board members have is time. Coupled with ESG issues, cyber threat prevention, and all of the other priorities directors face, how can boards continue the drive for increased diversity and prevent this priority from plateauing?
Mr. Cendrowski: Diversity has increased substantially in the last five years, according to a PwC survey. But to keep it up, more responsibility should be placed with specific board committees. And beyond that, the company’s HR department should play a role. Additionally, I’m also hearing more and more chatter about HR experience being needed at the board level – and it was brought up on one of the Corporate Governance Forum panels.
CorpGov: How should we define diversity moving into 2020? What is the most effective strategy to drive social diversity (e.g., gender, ethnicity, age, geography) and professional diversity/diversity of thought? Mandates, better recruiting, all of these?
Mr. Cendrowski: Companies really need to include operating experience as part of their definition of diversity. We can’t just be focused on gender and ethnic diversity.
To date, the diversity campaigns have focused heavily on ethnicity and gender and there was certainly a need for that. I believe the broader focus now needs to be diversity of thought in order to have companies thrive as they move forward.
In one example, a company I know of went and got someone from Middle America, who had an average income, for their board, precisely because that’s who their customers look like.
CorpGov: When it comes to recruiting and training new directors, the Australian Institute of Company Directors and Out Leadership’s Quorum program, a talent accelerator for LGBT+ board members and directors, is one example of how to provide potential candidates with top-flight boardroom training and networking opportunities. Are such accelerator programs a useful template that can be used to broaden diversity on boards?
Mr. Cendrowski: Accelerators are a great idea, especially on a regional level. You might have one in New York or Washington D.C., but also another in Detroit. Companies in all regions would like to have people who are trained and not just showing up on their radar without the necessary background. Everyone can’t go to the NACD program.
When things are local you’re going to have local support. When you have regional businesses, they can consider contributing to the community by offering board seats to local people. Part of a solution might be putting people on private company boards – a sort of a board member on training wheels. They don’t even necessarily need to be paid and they could be on a separate committee, to get experience.
CorpGov: In your experience, what are the best practices for boards to implement ahead of crises so that the board can exercise its responsibilities and the company can put its crisis response program into action?
Mr. Cendrowski: The first step is for a board to understand and identify the type of crises that might arise. And you also want to have specialized lawyers and PR firms on retainer so that you can respond quickly.
It’s also important for a board to walk through a tabletop exercise. Despite that value, only 8% of directors who do these exercises have any interaction with management, which can render the process essentially worthless. When a crisis actually happens, if the board and management disagree on the right course of action, it can damage relationships forever. The board needs to be confident that a management team will take its advice and agree to carry it out.
CorpGov: Given the current historic low unemployment in the U.S., what have you seen as the most effective role for the board to play when it comes to implementing a sustained human capital management program (war for talent) to promote gender/ethnic diversity in the workplace and create a desirable corporate culture?
Mr. Cendrowski: It’s important for human resources to play a larger role. The board of directors should be interfacing with HR to make more coordinated decisions.
Harry Cendrowski is a Founding Member and Managing Director of Cendrowski Corporate Advisors (CCA), a CPA and consulting firm focused on complex valuation, litigation advisory, risk management, corporate governance, and tax consulting and compliance for public and private companies, family offices, and professional associations. Over the last 35 years, Mr. Cendrowski has advised hundreds of businesses, family offices, private equity and venture capital funds, as well as serving as a board member for several companies and non-profits, court-appointed receiver for several multi-million dollar estates, and as the accountant to the trustee in high-profile bankruptcy cases.
Lawrence Elbaum, Partner and Co-Leader of Shareholder Activism at Vinson & Elkins LLP
When it comes to environmental, social, and governance (ESG) concerns, activist investors tend to focus much more on the “G” than the “E” or “S” – and only after they have found an economic thesis for increasing shareholder value. Looking ahead, activists may gradually make more ESG issues part of their campaigns as the proxy advisors have begun to incorporate such concerns into their reports. That’s according to Lawrence Elbaum, Partner and Co-Leader of Shareholder Activism at Vinson & Elkins LLP, who spoke to CorpGov after participating on a panel entitled “What Should Issuers Care About” at the 2019 Corporate Governance Forum. He also said he has observed more companies resolving issues with activists before fights become public, in part because issuers take precautionary measures such as hiring specialist attorneys, investment bankers, and corporate communications firms to help conduct introspective analyses. He also said that companies are well advised to acknowledge shortfalls in areas such as total shareholder return (TSR) or capital allocation – and explain why a particular strategy remains sound – before they become centerpieces of activist campaigns. He also presented three considerations issuers should be careful not to miss ahead of an M&A announcement. The full interview is below:
CorpGov: There has been much discussion of environmental, social, and governance (ESG) issues recently. To what extent have activists focused on ESG? Are they bringing it up privately if not in the context of a proxy fight?
Mr. Elbaum: Companies typically do not hear about ESG issues unless the activist has already identified an economic thesis to unlock value for shareholders. Once the economic thesis has been identified, then the company will most often start initially hearing from the activist about the “G” in ESG, arguing that poor governance led to a destruction in shareholder value. We hear less about the “S” in ESG, unless the activist has identified tabloid-worthy material, in which case, we’ll probably hear about this material privately before it is used publicly to exert pressure on the company. It is not the norm for activists to build campaigns against companies where the “E” in ESG is the centerpiece, but I suppose if the activist can link environmental shortcomings of a company to loss of value for shareholders, then presumably this could become a key and compelling campaign issue. Now that the proxy advisory firms are focusing more on the “E” in ESG in their reports, we should expect to see activists incorporating environmental themes more prominently into future campaigns.
CorpGov: What’s been going on behind the scenes? Have activists tried to negotiate more privately and even avoided making their stakes in companies secret?
Mr. Elbaum: Each year, we see more campaigns getting resolved before activists take their fights to the court of public opinion. 2019 was no exception. One reason this is happening is that boards are preparing in advance and more frequently. They are hiring specialists, such as law firms, investments banks, boutique advisory firms, proxy solicitors and corporate communications firms in “peace time” before the threat of activism is imminent to look at themselves and their companies through the lens of the activists. As a result, they are channeling their “activists from within,” which many times sets into motion a chain of events, such as board, corporate governance and business enhancements, that can convince a true shareholder activist that the company is not a worthy target.
CorpGov: Does TSR (total shareholder return) continue to be the most important factor in proxy fights and do you see that changing? At a minimum, are companies managing to train a focus on longer-term TSR rather than a few quarters?
Mr. Elbaum: TSR on an absolute basis and relative to industry and proxy peers is always a good benchmark. However, activists are not just looking at TSR on a 1, 3 and 5 year basis, as ISS and Glass Lewis are known to do. In fact, boards and management teams are increasingly being taken to task by activists for having bad TSR quarter-to-quarter. This year, we saw an unprecedented number of companies facing activists within a year from their IPO or spin-off from another public company. Activists are also taking companies and boards to task for revising guidance downward and for capital allocation blunders. One of the worst reactions to TSR, guidance and capital allocation blips is when companies and their boards fail to acknowledge that performance is lagging. Companies are well-advised to give a “mea culpa” when one is warranted and to clearly articulate why a hiccup occurred, how the board and management were prepared for it and not caught flatfooted and how the go-forward strategy still works and will lead to value maximization. Bringing on activism defense specialists once it looks like the company will experience a “road bump” is a good way to get out in front of many of the issues an activist might raise before a public spectacle is made.
CorpGov: What should companies do to prevent investor uproar ahead of announcing M&A deals?
Mr. Elbaum: There are three considerations that companies often miss before announcing an M&A transaction, most often in all stock deals or deals involving both stock and cash.
- As part of regular, “peace time” engagement with shareholders, engage in dialogue with them about the types of M&A, if any, they would like to see the company pursue and also about their views on M&A, in general. It is important to understand your shareholders’ – your owners’ – investment theses and to set their expectations as well. Often times, boards and management teams do not undertake this exercise until they are actually on a roadshow trying to get a shareholder vote across the finish line on a deal – when it is often too late to flip unsupportive shareholders.
- Companies have one chance most often to explain the deal rationale and bona fides to shareholders. This normally takes place when the deal is announced and there is a joint earnings call, press releases and investor deck from target and acquirer. These investor-facing events and materials are normally the last items the parties focus on while advisors scramble to get a transaction signed. Frequently, companies are simply not prepared with a refined message about the transaction due to this time crunch. Companies are well-advised to begin work on these items as early as possible and to rehearse. It can be very difficult to rehabilitate even the greatest transaction that is not initially communicated properly to investors and the market.
- Companies should not rush into a deal because they are dealing with public or private activism. Boards should be focused on getting the best deal with the best terms for shareholders, while being completely agnostic about how a consummated deal might affect their directorships. And by following steps 1 and 2, boards will be much better positioned to demonstrate that M&A was not self-serving or reactionary, but part of a thoughtful, ongoing and deliberate process to maximize value.
Mr. Elbaum is co-leader of V&E’s Shareholder Activism practice based in New York City. In this role, he draws upon approximately 15 years of experience as a securities and governance attorney and business advisor to counsel senior management and boards of public companies with respect to proxy contests and other shareholder activism campaigns, such as merger contests, shareholder proposals, consent solicitations, withhold the vote/vote “no” campaigns and short attacks. Mr. Elbaum also advises these clients concerning complex corporate governance matters, strategic investor relations and related litigation and investigations in the U.S. and abroad.
Over the past several proxy seasons, Mr. Elbaum has defended over 100 companies and their boards facing shareholder activism campaigns. In the last year alone, he has been a lead activism defense attorney in connection with the defense of the boards and C-suites in connection with over 30 shareholder activism campaigns brought by some of the most high profile activists in the world. He also represents select investors in connection with their activism campaigns and white squire investments. Mr. Elbaum is also considered to be a thought leader in the shareholder activism industry and is frequently sought after to sit on/host panels at conferences and for quotes in widely distributed publications. For example, over the course of the past year alone, he has participated in panels for National Association of Corporate Directors (NACD), Women Corporate Directors (WCD), The Boule (Sigma Pi Phi), Latino Corporate Directors Association (LCDA), and The Directors League. In addition, Mr. Elbaum is often quoted and/or interviewed by activism reporters for The Wall Street Journal, Thomson Reuters, The Deal, 13D Monitor and Activist Insight, among other publications.
Lyndon Park, Managing Director and Head of Governance Solutions at ICR Inc.
Lyndon Park, Managing Director and Head of Governance Solutions at ICR Inc., moderated two panels: “ESG & The Long-Termist Approach: Mission Critical or Optional?” and “Responsible Owners or Activists”. Reflecting on the Corporate Governance Forum, Mr. Park pointed out that ESG investing is truly being led by directives from Europe, where regulators have asked investors to prove they are taking ESG matters into account as they manage portfolios. He also said that active managers have begun to realize ESG is critical to avoid suffering outflows. The full interview is below:
CorpGov: There was an emerging theme of ESG discussed in every panel. How much of the urgency around ESG is fact vs. rhetoric?
Mr. Park: The ESG landscape is dramatically changing, and it’s really arising from regulatory and compliance trends from EU. The UK Stewardship Code and EU Shareholder Rights Directive are asking global investors to evidence how they are integrating ESG and engaging about the issues. Though there isn’t a “bright line” rule, managers – especially active managers – are quickly adjusting to the new environment by adopting ESG integration for their portfolios, not just EU-based strategies, but globally.
CorpGov: How does this impact companies?
Mr. Park: In this era where many of the active funds are seeing outflows, the leading active managers are getting real about ESG to be competitive and win mandates. The passive managers, of course, are getting even savvier on ESG. For companies now, ESG means being able to attract capital or not, or being included in indices or not.
CorpGov: What can companies do to come up to speed on ESG to meet investor demands?
Mr. Park: With over 100 rating agencies out there, it’s impossible to please everybody. At ICR, we recommend clients to first frame their ESG narrative using the SASB materiality framework and tell their stories to investors. The “Know Your Shareholders” imperative is more crucial for ESG, as each investor uses different methodologies and tools to calculate a company’s ESG rating. By focusing on the “greatest common denominator” issues and learning how to harvest low-hanging ESG fruits to raise ESG ratings, a company can begin evolving its ESG profile on its own terms.
Lyndon Park is Head of ICR Governance Solutions, which advises boards and management teams on complex corporate governance, ESG, and activism/event-driven issues to align with investor and market expectations. Previously, Mr. Park was Head of Global Corporate Governance at Dimensional Fund Advisors where he oversaw and implemented the firm’s global stewardship and ESG initiatives. Prior to Dimensional, he was Partner and Head of Governance & Listing Standards at Equilibrium Stock Exchange, a capital markets start-up. Mr. Park began his career in governance at BlackRock by supporting BlackRock’s board of directors on intra-company governance matters, before serving as one of BlackRock Investment Stewardship team’s lead governance analysts overseeing portfolio companies representing around $450B of BlackRock’s AUM. In his combined tenure as a governance leader at BlackRock and Dimensional, he engaged with hundreds of board and management team members on matters related to corporate strategy, governance, ESG and event-driven/crisis situations, and has covered and made decisions on most of the key contentious proxy battles in recent years as an investor. Mr. Park received his BA in English Literature, magna cum laude, from Columbia University.
Bob Marese, Managing Director, MacKenzie Partners, Inc.
While it may appear hedge funds aren’t focused on ESG issues, their underlying investors such as university endowments often are and will want ESG to be part of the investment decision process. That’s according to Bob Marese, Managing Director at MacKenzie Partners, Inc., who moderated the panel “What Should Issuers Care About” whose speakers included Lawrence Elbaum, Co-Head of Activism Defense at Vinson & Elkins, Amy Lissauer, Global Head of M&A-Activist and Raid-Defense Advisory at Bank of America, Lyndon Park, Managing Director and Head of Governance Advisory Solutions at ICR, and Marc Lindsay, Head of Portfolio Company Engagement, Analysis and Voting at Vanguard. In an interview following the Corporate Governance Forum, Mr. Marese said issuers need to “think like an activist” and recognize weaknesses they may have in areas such as corporate governance well before shortcomings are pointed out publicly by someone else. When it comes to M&A, Mr. Marese said companies should provide as much information as possible at the time of announcement because any gaps can create opportunity for dissidents to criticize the deal. He also explained what kind of circumstances could lead a company to settle with an activist. The full interview is below:
CorpGov: Broadly what should issuers know?
Mr. Marese: Not surprisingly, the panelists shared many common views, chief among them, and in no particular order: Issuers need to meet with their top shareholders when skies are “blue” and not just when skies are “cloudy/grey”; boards need to get quicker at making decisions – with the input of their advisors – when responding to activists; and, underlying investors that seed hedge funds and institutions do care about ESG. Endowments want more action taken around ESG issues because their students clearly care about it and unions are concerned about the safety of their workers.
Issuers need to think like an activist and conduct a regular and thorough review of the same matters that draw activists into a stock. What are a company’s particular governance weaknesses? Does the board have a long-term refreshment strategy in place for its members? Is an issuer’s strategic vision being clearly and consistently communicated to the market and investors? Are there execution vulnerabilities? Is the company adequately assessing and addressing potential issues, for example those that may emerge around cyber intrusions or supply chain disruptions whether from geo-political or environmental issues?
CorpGov: What are some of the mistakes boards can make during the initial period when they are reviewing an activist’s ideas and considering an appropriate response?
Panelists agreed that issuers should not have a knee-jerk reaction when an activist pops up. As one panelist noted, there is no monopoly on good ideas. On the theme of an activist emerging in a particular stock – it should not come as a surprise that an issuer’s individual performance or sector-wide issues create the opportunity for an activist to develop an investment thesis around change. A frank evaluation of these issues can clearly provide an early warning of problems ahead. Activists on their own have zero power unless supported by the target company’s largest shareholders, and the proxy advisory services – ISS and Glass Lewis – all of whom will weigh the case for change and will make a voting decision or recommendation that is reflective of their evaluation of this need.
CorpGov: What are some of the challenges presented by M&A activism?
Panelists urged a company involved in a transaction to not announce a deal without providing as much, if not all, of the information that would allow investors to make an informed decision around the merits. This is especially true in stock-for-stock transactions. All agreed that the absence of information creates opportunities for a dissident shareholder, whether a pre- or post-announcement holder, to step in and agitate around the price being paid, and/or the financial or strategic logic of a deal.
Issuers need to be able to discuss and provide answers to investors in regard to the process that led to the decision that a particular M&A transaction is in the best interest for shareholders. Further, a company should be able to indicate that all options were explored and thoroughly analyzed.
CorpGov: How do companies determine when and how to settle? In what circumstances might a company want to settle, and when might it want to fight?
Decisions around a potential settlement with an activist need to be evaluated on a case-by-case basis. Issuers should weigh the feedback they have previously received from investors against the “case for change” being presented by an activist; to the extent these criticisms align, a board and management should take note, as it can be an excellent indication of the outcome of a shareholder vote. Potential distraction, disruption and cost to a company, its employees, customers, and vendors cannot be underestimated. The more severe, the more an issuer should give settlement serious consideration.
Allowing the dispute to go to a shareholder vote should be considered when all efforts to reach a reasonable and workable settlement with an activist have failed. Separately, if there is a true disagreement over the competing strategic visions presented by the issuer and activist, there may not be a workable path forward other than a shareholder vote. In this case, it can often be advisable to let a company’s investors weigh-in, through their voting franchise, to make a decision on the composition of the board and ultimate direction of the company.
CorpGov: How do investors analyze settlements?
Both Marc and Lyndon (formerly of Blackrock and Dimensional Fund Advisors) agreed – as did their advisor cohorts – that generalizations in this regard are difficult as each situation needs to be evaluated on a case-by-case basis. But, boards should move quickly, yet thoughtfully, when faced with decisions regarding how to deal with an activist. Investors will also evaluate the board’s decision to settle in light of feedback and criticism provided during previous engagements with the issuer. And to the extent an issuer has not engaged, an investor may express an opinion through its voting franchise.
Mr. Marese is a Managing Director at MacKenzie Partners. His practice is primarily focused on advisory, consulting, proxy solicitation and information agent services related to: complex M&A, both negotiated and unsolicited; contests for board control and representation; and, defense advisory and corporate governance consulting. Apart from engaging in activities for U.S. and Canadian clients, Mr. Marese is responsible for firm-wide operations in the U.K. and Europe. He holds an MBA in Accountancy from the Zicklin School of Business at Baruch College. Mr. Marese is a member of the Society of Corporate Secretaries and Governance Professionals and the National Investor Relations Institute.
