Proxy Fight: Why Activitsts May Be Good for Investors
Annual shareholder meeting season is getting underway and with activist shareholders likely to make noise at the meetings, that may be a good thing for long-term investors.
From demands for Apple to return more cash to shareholders to investors calling for JPMorgan Chase to strip CEO Jamie Dimon of his chairman role to the battle between Carl Icahn and Bill Ackman over Herbalife, investors have been vocal in trying to force corporate management to make changes.
"What's unusual is meeting season doesn't really get underway until mid-April," said Institutional Shareholder Services Executive Vice President Patrick McGurn. But with three bellwether meetings—Apple, Walt Disney, and Hewlett-Packard—this month, it "bodes for a busy season driven by a lot of ad hoc activism," he said.
Hedge fund Jana Partners has proposed a slate of five new directors for election to Agrium's board and is pushing the company to spin off its retail farm-equipment arm. At Transocean, billionaire investor Icahn wants to see a big dividend increase.
There is also a "no-vote" campaign targeting directors at Hewlett-Packard's annual meeting on March 20. Shareholders are being urged to oppose the re-election of some HP board members after the controversy surrounding the $11 billion acquisition of Autonomy. HP rules require board members receive a majority vote even if they run unopposed.
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ISS's McGurn noted that shareholder resolutions account for a relatively smaller part of the shareholder activism pie as "a lot of the engagement that has taken place has taken place off proxy."
Lee Graul, a partner in the corporate governance practice at professional services firm BDO USA, said large investors tend to go public with differences they have with management when they don't get the response they were looking for in private conversations.
What we see "frequently is shareholders take the internal approach first," Graul said. Apart from the ballot initiatives, BDO expects corporate management to also face questions about the economy, health-care reform, the sequester, and M&A plans this season.
Calls for an independent chairman at big U.S. companies is also a slowly building issue, but investors have so far been cool to the proposals.
About 61 percent of S&P 500 companies combine the CEO and chairman roles, while only 21 percent have an independent chair, according to ISS. Most companies with a combined role now have a lead director position to act as a shadow, McGurn of ISS said.
While there have been some high-profile calls to split the chairman and CEO roles at companies such as Disney, JPMorgan, and Goldman Sachs, McGurn said "reform seems to be taking effect in slow motion." There were 56 proposals voted on in 2012, according to ISS.
Investors have had a mixed view to these proposals. Most have only garnered about 35 percent support. McGurn said that shareholders' attitude has been if it isn't broke don't fix it, unless they're anxious about performance or corporate governance issues.
Repealing "classified boards"—where certain directors serve different lengths of time—and ending super-majority voting are issues shareholders have been more active in pushing and voting for, McGurn said.
BDO's Graul said he hasn't heard as much talk about this issue in 2013 as in the past two years. "Most of the comments about corporate management comes in the area of compensation rather than duties," he said.
Disney shareholders already rejected a proposal to split the chairman and CEO roles when Bob Iger steps down in 2016. Iger told CNBC: "This is a cause searching for a problem."
He said there's little evidence that when the roles are combined a company performs better or worse. "In reality, if you have an experienced, independent, and engaged board that knows what is going on at companies, that is in communication with management, and also open to shareholders, it doesn't matter whether you have a CEO that also has the chairman's role," he said.
ISS, which advised shareholders to vote for the proposal, also acknowledged that there were no governance issues at Disney.
Richard Kovacevich, former chairman and CEO of Wells Fargo, told CNBC he sees some advantages in separating the two roles, but there should be a compelling reason, such as succession, for doing it.
Splitting the two roles "because you're concerned that the CEO doesn't have the proper talent or is not managing risk well, I don't understand that," Kovacevich said. "You should get rid of the CEO, not try to overlay chairman because of some sort of deficiency."
Activism May Be Good for Long-Term Investors
Most investors make noise when they feel they are not getting the right return on the investment itself, BDO's Graul said. But former General Electric Chief Jack Welch brushed off activists as simply looking to make a quick buck. "Look, these guys are after a quick hit. I'd blow him off," he told CNBC. "I'd give [hedge fund manager and investor activist David] Einhorn the back of my hand."
Nonetheless, long-term investors should applaud greater activism, New York University, Stern School of Business professor Aswath Damodaran told CNBC.
Damodaran said that Apple CEO Tim Cook illustrates a problem with corporate managements who "think they don't have an obligation to tell investors what they are planning to do."
While Damodaran doesn't have a specific plan for what Apple should do with its cash pile, he said Cook "doesn't feel the need to explain what he wants to do with the future of the company."
He said the game is rigged in favor of incumbent managements and that an activist investor, who like all investors are motivated by hopes of better returns, helps shift the balance of power back.
Damodaran added that the sign of a good activist is targeting the right company: "Once you rock the boat, good things tend to happen."
— By CNBC's Justin Menza