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 spoke at the 2019 Corporate Governance Forum, where he 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?
Mr. Marese: 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?
Mr. Marese: 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?
Mr. Marese: 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?
Mr. Marese: 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.
John Jannarone, Editor-in-Chief