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Governance : Investor Relations : Institutional Activism : Thought Leader
Investor Relations: A Power Shift in the Making
By
Deborah Wallace
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Deborah Wallace
Principal
BrinkPoint Consulting
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Investor Relations has become a lightening rod in the current Governance Reform movement. In an effort to have greater say in company performance, individual shareholders and institutional investors are engaged in major power struggles with their companies’ boards and executive leadership.
Parties in power struggles have various means of resolution available to them, including litigation. But while litigation may be a viable option for institutional investors and for extravagantly funded private equity groups, it is not viable for the vast majority of individual shareholders. How, then, can the interests of ordinary shareholders have a chance of being protected?
Investor activism may be a partial solution, despite its relative immaturity and questionable impact. The goals of responsible activism are to give voice to shareholder concerns, to protect the interests of shareholder, and to achieve a positive financial impact on company performance. While there are many instances in which activism has achieved one or more of these goals for shareholders, the manner in which activism is carried out is often problematic. Hedge fund and private equity activists as well as institutional activists continue to be perceived, fairly or not, as self-serving and ethically irresponsible.
As the newest eight hundred pound gorilla to enter the IR arena, institutional activism has drawn the attention of both proponents and skeptics. Proponents argue that, when exercised judiciously, institutional activism is not only an effective way to monitor a company’s performance but also a means of creating shareholder wealth. Skeptics, on the other hand, argue that institutional activism has a serious downside. Because of the vast resources available to it, institutional activism, the argument goes, is vulnerable to abuse by unethical or “uninformed” portfolio managers seeking to line their own pockets rather responsibly managing the investments of the shareholders they represent. Ironically, this split between those who favor institutional activism and those who oppose it creates another locus of disagreement, a by-product power struggle of sorts, producing conflict within conflict.
On a more optimistic note, there is evidence that a more equal balance between investor and corporate interests can be achieved and not always as a Pyrrhic victory. Nelson Peltz’s takeover of the HJ Heinz board in 2006 was a notable exception to the recklessness and greed that frequently characterizes private equity activism. While this takeover was traditional in many respects, costing the Heinz Company hundreds of millions of dollars in legal fees as well as a damaged reputation, it was in the end a successful effort to restore a broken company thereby preserving and increasing shareholder wealth. Indeed, within one year of Peltz and other members of the Trian Group assuming board seats and replacing its CEO, Heinz stock returned a 34 percent increase to its shareholders.
CalPERS, the California Public Employees' Retirement System, is another example of how responsible activism. CalPERS, which in 2006 filed suit against UnitedHealth Group (NYSE: UNH) over its stock-option grant practices, has since partnered with UnitedHealth Group in a very public effort to permit greater shareholder participation in the director nomination process. As the largest pension fund in the country, with more than $240 billion in assets, CalPERS has developed a proposal that would allow certain UNH shareholders to nominate its own directors of choice on the condition that they, the nominating shareholders, own at least 3 percent of the company’s stock for a minimum of 2 years. In parallel, UnitedHealth Group has launched a comprehensive website to educate its shareholders about its past problems, the CalPERS proposal and the potential benefits for shareholders of actively engaging in the proxy voting process. (To read an evaluation of CalPERS, see “Monitoring the Monitor: Evaluating CalPERS Activism.
For now, we are not yet at the point where we can attempt to define an overall approach to activism by which investors and corporations might come to enjoy some semblance of mutually shared power. The jury is still out on the costs and benefits of investor activism. The environment in which constructive activism should be most useful is in radical flux. In the meantime, our time and effort as directors can be best spent by requiring of ourselves more effective and consequential communication with shareholders; routine consideration of the downside as well as the upside of our individual and collective decisions; and a willingness to explore global models of effective investor relations.
Deborah Wallace
Principal
BrinkPoint Consulting
Deborah E. Wallace is the Principal of BrinkPoint Consulting. She has been consulting with Boards of Directors for more than 20 years.
She can be reached at 781-259-0550 or at dwallace@brinkpointconsulting.com
For more information go to www.brinkpointconsulting.com
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