Now that the details of the House and Senate’s negotiated financial reform bill were revealed Friday, it appears that the sausage makers on Capitol Hill have left out two seemingly critical components that the corporate governance set believes would have leveled the playing field between investors and the Boards of Directors. And this is just fine with activist investors. They don’t think the provisions would have helped them anyway.
For one thing, the bill does not require public companies to have a majority voting threshold in uncontested director elections. This provision was in the earlier bill passed by the Senate but not in the House bill passed late last year. This means most companies will maintain the current undemocratic system whereby all a director needs is one measly vote to be re-elected.
The other key governance item that seemingly fell out of the final bill at the last minute was proxy access. This would have given certain shareholders under certain circumstances the right to nominate directors. This seems like a powerful tool for investors, who otherwise must mount a costly proxy fight and submit their own proxies and voting cards.
Congressional conferees haggled over a number of triggering issues — the size of the stake in a company the shareholder would need and the length of time they need to own the position before and after the annual meeting before they can submit their slate of directors to the company. The House and Senate proposals called for investors holding minimum stakes of 1 percent to as much as 5 percent before they could qualify for participating in the director nominee process.
In the end, lawmakers decided not to include proxy access altogether. Rather, they chose to send the issue back to the Securities and Exchange Commission, telling the regulator it is their problem and issue to figure out on its own.
What cowards.
Wouldn’t majority voting and proxy access have made it easier for hedge funds to stir things up at companies? Nah.
Well known activists tell me that although they think from a moral standpoint majority voting is the right way to go, it would not have impacted their strategy or made it easier for them to get their way with a company. “It would not make a difference,” one hedgie tells me. As for proxy access, one hedge fund activist calls it “meaningless.” He tells me if you want to launch a proxy fight you would prefer to do it on your own rather than place your nominees on the company’s proxy. “Proxy access is not for the professional guys,” he says. “It is more for the gadflies.”
These are the special interest, single issue rabble-rousers who spook the U.S. Chamber of Commerce and Business Roundtable. In this case even one hedge fund manager agrees, telling me: “If there is a bunch of one percenters out there, there would be too much noise out there.”
In fact, last year when the SEC submitted its own proxy access proposal, at least two hedge funds submitted comment letters opposing the regulator’s provision to allow shareholders to submit director nominations if they held between 1 percent and 5 percent of a particular company’s outstanding shares, depending upon the company’s size. William Ackman’s Pershing Square said the threshold was too low, but did not suggest a specific hurdle.
In its comment letter, ValueAct said it preferred an ownership threshold of at least 10 percent of the company’s outstanding shares, and held for at least one year, before a shareholder can nominate a director. In effect, ValueAct, which regularly negotiates a position on the Boards of Directors as a part of its overall strategy, recommended opposing both the House and Senate proposals.
Stephen Taub, who has covered the hedge fund industry for 30 years, is a contributing editor to Institutional Investor and Absolute Return-Alpha magazines.
