Posts Tagged ‘Corporate Governance’

A new Journal of Finance paper examines whether improvements in a company’s internal corporate governance create value for shareholders. In The Vote is Cast: The Effect of Corporate Governance on Shareholder Value Vicente Cuñat, Mireia Gine, and Maria Guadalupe analyze the market reaction to governance proposals that pass or fail by a small margin of votes in annual meetings to identify the  impact of shareholder sponsored changes to governance rules on shareholder values and management behavior. Cuñat et al find that passing a proposal leads to significant positive abnormal returns:

Adopting one governance proposal increases shareholder value by 2.8%. The market reaction is larger in firms with more antitakeover provisions, higher institutional ownership, stronger investor activism, and for proposals sponsored by institutions. In addition, we find that acquisitions and capital expenditures decline and long-term performance improves.

The authors also conclude that, besides establishing how much shareholder value is generated by increasing shareholder rights and improving corporate governance inside firms, shareholder activism can create significant value:

Improving democracy inside firms, so that shareholder proposals that fall short of the majority threshold pass, would be value-increasing. We are able to precisely quantify that value.

We find that institutional activists’ proposals have higher effects, with an abnormal return of 2.1% on the day of the vote and a further 2.2% over the following six days. For individual proponents, the cumulative effect after one week is just 1.1%, and it is not statistically different from zero.

Read the full paper here: The Vote is Cast: The Effect of Corporate Governance on Shareholder Value (February 17, 2010 version on SSRN)

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We’ll be in San Diego next week for the Hedge Fund Activism and Shareholder Value Summit. If you’re going too, and you’d like to catch up, we’d love to hear from you. You can reach us at greenbackd [at] gmail [dot] com.

We’ll be posting intermittently next week, but we’ll be back to our regular schedule starting from Monday, 28 September. Hopefully we’ll have some new insights to share.

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Bloomberg reports that the Securities and Exchange Commission (SEC) will consider a proposal to allow shareholders to nominate directors on proxy statements. At present, shareholders must distribute a separate ballot listing dissident nominees, which makes the process too expensive for most investors and means only large activist investors like Carl Icahn or Bill Ackman have the capital to wage proxy fights to get their nominees elected. Says SEC spokesman John Nester, “We are committed to considering new rules that would remove barriers so that shareholders are able to exercise their right to nominate directors.”

The proposal under consideration by the SEC would allow shareholders, or groups of investors, who have held a certain proportion of a company’s shares for one year nominate directors on the proxy. The threshold would be 1% for companies with market capitalizations greater than $700M, 3% for companies below $700M and 5% for companies below $75M.

Hat tip The Official Activist Investing Blog.

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In Now a baker’s dozen in North Dakota, footnoted.org’s Michelle Leder tracks the small, but growing number of companies whose shareholders are requesting via the annual proxy process that their companies relocate to North Dakota:

Last week, 11 companies, including Exxon Mobil (EOM), Southwest (LUV), and Amgen (AMGN), were on the list. But since Friday, two more companies have been targeted, which makes it a baker’s dozen. Over the past two days, shareholder activist John Chevedden, who has introduced proposals at Southwest and two others, added Continental Airlines (CAL) and Staples (SPLS) to his list.

The rush is on because the corporations law in North Dakota is intended to be much friendlier to shareholders. Shareholders in North Dakota can expect the following (from the 2007 press release announcing the bill):

· Majority voting in election of directors. In an uncontested election of directors, shareholders have the right to vote “yes” or “no” on each candidate, and only those candidates receiving a majority of “yes” votes are elected.

· Advisory shareholder votes on compensation reports. The compensation committee of the board of directors must report to the shareholders at each annual meeting of shareholders and the shareholders have an advisory vote on whether they accept the report of the committee.

· Proxy access. The corporation must include in its proxy statement nominees proposed by 5% shareholders who have held their shares for at least two years.

· Reimbursement for successful proxy contests. The corporation must reimburse shareholders who conduct a proxy contest to the extent the shareholders are successful. Thus, if a shareholder conducts a proxy contest to place three directors on a corporation’s board and two of the candidates are elected, the shareholder will be entitled to reimbursement of two-thirds of the cost of the proxy contest.

· Separation of roles of Chair and CEO. The board of directors must have a chair who is not an executive officer of the corporation.

As we’ve discussed previously, Carl Icahn is a supporter of North Dakota’s initiative, and has even proposed a federal law that allows shareholders to vote by simple majority to migrate a company from its state of incorporation to more shareholder-friendly states, including North Dakota. At present, that power is vested in boards, which means that even if the proposal passes, the boards must embrace the proposal before it is binding on the company. Leder thinks this means it’s unlikely that the companies will up stakes for North Dakota, but it’s interesting to watch.

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In Ackman and Target Tangle in Ballot Brawl, The New York Times’ Dealbook has coverage of the “universal ballot” spat between William A. Ackman’s Pershing Square Capital and Target Corporation (NYSE:TGT).  A candidate on Pershing Square’s ticket, Ronald J. Gilson, who is a law professor at Stanford University and an expert in corporate governance, has proposed that TGT place all the nominees running for election to the board on a single ballot, the so-called “universal ballot.” Presently, shareholders in most proxy fights receive two proxy cards and can vote only for one slate of candidates. Gilson’s proposal would give TGT’s shareholders the chance to pick candidates from both management and Pershing Square’s proxies.

Dealbook reports that the shareholder advisory firm RickMetrics Group support the universal ballot proposal:

“Pershing appears to be astutely exploiting the current pro-(shareholder)-choice zeitgeist, and puts Target on its back foot,” RiskMetrics said in a research note issued Tuesday. “It will be challenging for Target, absent some sort of unwaivable legal impediment, to argue against Pershing’s proposal without coming across as anti-shareholder.”

Here is Gilson’s letter to the board:


Charles J. Meyers Professor
of Law and Business

April 21, 2009

Mr. Gregg Steinhafel
Chairman of the Board
Chief Executive Officer and President
Mr. Timothy R. Baer
Executive Vice President
Corporate Secretary and General Counsel
Target Corporation
1000 Nicollet Mall
Minneapolis, Minnesota 55403

Re: Proposal to Use a Universal Proxy at the2009 Annual Meeting of Shareholders

Dear Messrs. Steinhafel and Baer:

On March 17, 2009, Pershing Square Capital Management, L.P. publicly announced that its affiliates had delivered a Notice of Nomination to you proposing to nominate five individuals for election as directors of Target at the company’s 2009 Annual Meeting of Shareholders. I am one of those nominees.

Both Target and Pershing Square have a unique opportunity to make this election historic from a corporate governance perspective. As you may know, the press has reported that SEC chair Mary Schapiro has directed the Commission’s staff to draft proposals for rules governing shareholder proxy access by mid-May 2009. I expect those proposed rules will provide the opportunity for the use of a universal proxy card whereby shareholders can choose – on one proxy card – from among the candidates nominated both by the company and by shareholders. The benefit to shareholders, who may want to choose members from both slates, would be substantial.

I first wrote about the need to remove the barriers to non-control proxy contests some 19 years ago.1 The occasion then was to recommend a change in the bona fide nominee rule to allow a shareholder running a short slate to include the names of the company’s nominees on the shareholder’s proxy card. That recommendation was accepted by the SEC, as I recall at the urging of Mary Schapiro, who was then a Commissioner.

Target and Pershing Square now have the opportunity to proactively provide good corporate governance to the Target shareholders by making it convenient for them to make a choice in what, in the end, is their election. This is not a control contest. The qualifications of the candidates will be fully vetted by the time of the May 28th election, and Target shareholders are entirely capable of assessing the candidates and making a choice. There is simply no excuse to deny shareholders the benefit of the use of a universal proxy card. The alternative will make it procedurally more difficult for Target shareholders to exercise their franchise. This is a problem that we, together, have the power to solve.

I have received assurance from Pershing Square that they would support a universal proxy card for Target’s upcoming Annual Meeting. I now seek the same from you. In the alterative, I ask that you consider allowing the company’s nominees to be named on the Pershing Square Gold proxy card. In either instance, shareholders would have the benefit of being able to choose the best nominees for the job. Target now has the opportunity to hold an election that will be a credit to the company’s corporate governance. I urge you to carefully consider this proposal and do the right thing for Target shareholders.

Very truly yours,

/s/ Ronald J. Gilson

1 Ronald J. Gilson, Lilli A. Gordon & John Pound, How the Proxy Rules Discourage Constructive Engagement: Regulatory Barriers to Electing a Minority of Directors, 17 Journal of Corporate Law 29 (with L. Gordon & J. Pound) (1992).

Here is TGT’s response:


MINNEAPOLIS, April 21, 2009 – Target Corporation (NYSE:TGT) today commented on the letter from Pershing Square nominee, Professor Ronald J. Gilson, that Pershing Square filed with the Securities and Exchange Commission (“SEC”). In the letter, Professor Gilson references possible future SEC changes to the federal proxy rules and proposes the use of a universal proxy card by Target and Pershing Square. Pershing Square has initiated a proxy contest to elect its own nominees, including Professor Gilson, to Target’s Board of Directors.

The company said, “We believe Professor Gilson’s proposal, coming at this stage of the proxy contest, would cause delay and confusion. Shareholders have a clear choice between our independent nominees on our WHITE proxy card and Bill Ackman’s slate on Pershing Square’s gold proxy card. We note, as does Professor Gilson, that the SEC may be considering a proxy access proposal. Any such proposal should be allowed to proceed on an appropriate timetable allowing for careful review and consideration by the SEC of a number of issues, including whether proxy access should be available to an entity, like Pershing Square, which has initiated its own proxy contest. In the meantime, the current proxy rules provide a framework for the conduct of the proxy voting process that is perfectly adequate for resolving the issues that Pershing Square is raising.

“With Target’s Annual Meeting only five weeks away, we believe our shareholders clearly understand the choice between our independent directors and the Pershing Square slate. We will be mailing our proxy materials shortly and encourage our shareholders to use our WHITE proxy card to support the reelection of the directors nominated by our Board.”

Shareholders who have questions about voting or the matters to be voted upon at the Annual Meeting are encouraged to call MacKenzie Partners, Inc. at 800-322-2885 Toll-Free or Georgeson at 866-295-8105 Toll-Free. The company will hold the 2009 Annual Meeting of Shareholders on Thursday, May 28, 2009. Target will be distributing proxy materials to shareholders of record as of March 30, 2009.

And Pershing Square’s response:

Pershing Square Comments on
Target’s Objection to Universal Ballot Proposal

New York – Pershing Square Capital Management, L.P., and Professor Ronald J. Gilson, who has been nominated by Pershing Square to serve as an independent director of Target Corporation (NYSE: TGT), expressed disappointment with Target’s response to Professor Gilson’s letter seeking the use of a universal proxy card, naming both Target’s and Pershing Square’s nominees, for use in connection with Target’s upcoming Annual Meeting of Shareholders.

“Rather than causing confusion, the proposal would eliminate confusion by giving shareholders something they would otherwise lack – the simple chance to choose the best among all of the candidates, rather than between two slates of candidates.” commented Professor Gilson. Pershing Square believes that the adoption by both Target and Pershing Square of a universal proxy card would reflect best-in-class corporate governance, and would result in the most qualified directors being elected, regardless of which proxy card a shareholder returned.

On the universal proxy card proposal, Bill Ackman of Pershing Square said, “it’s important for shareholders to have a choice so that they can vote for whichever candidates they prefer, regardless of which proxy card they submit. Pershing Square wants to provide shareholders with that freedom of choice. We are hoping Target will as well.”

Because proxy cards have not yet been mailed, and because new proxy cards are easy to print from the company’s or Pershing Square’s website, Pershing Square does not believe that adopting a universal proxy card would add any material expense to the proxy contest. Pershing Square also noted that it would be willing to bear the additional printing costs of the universal proxy cards.

Furthermore, Target’s public explanation for its refusal to use a universal proxy card does not address why Target would not permit its nominees to be named on Pershing Square’s Gold proxy card. Indeed, based on the timing of Target’s public response, Pershing Square questions how the matter could have been raised with its Board of Directors and whether Target’s nominees were given the opportunity to consent to being named on a universal proxy card or Pershing Square’s Gold proxy card.

Pershing Square requests Target’s nominees for permission to be included on the Gold proxy card in the event that the company will not consent to a universal proxy card.

[Full Disclosure:  We do not have a holding in TGT. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]

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In an opinion piece for the New York Times titled, We’re Not the Boss of A.I.G., Carl Icahn argues that the legal “devices” that disenfranchise shareholders “can be found at the root of today’s financial crisis:”

The legal landscape is filled with devices designed by state legislators and courts to prevent shareholders from influencing how companies are run and so allow management free rein. Legal mechanisms known as poison pills, permitted under the laws of most states, effectively prohibit shareholders from accumulating a large position in a company or working with other large shareholders to influence the company.

Furthermore, public corporations may legally adopt a staggered board, whereby board members are grouped into classes, with each one representing about a third of the total number of directors, so that only one class comes up for election in a year.

This means that seriously shaking up a board would require at least two very expensive proxy contests over two years. And current state laws permit incumbent board members access to the corporate treasury, allowing them to spend millions of dollars, to hire lawyers and public relations firms, run ads and mail materials to prevent shareholders from adding their designees to the board of directors.

One problem identified by Icahn is complex “advance notice” requirements that enable companies to derail efforts to elect shareholder-nominated board members:

Although a majority shareholder like the government may be able to get its nominees onto the A.I.G. board without a fight, typically even a large shareholder must conduct an expensive proxy contest to elect its nominees – that is, he needs to solicit enough votes from other shareholders. This is accomplished by mailing a statement describing the shareholder’s positions, and a card on which to vote. At a large public company, mailing, printing and other costs can run into the millions of dollars.

Icahm has a typically straight-forward solution to the problem:

Those costs could be reduced, and the election process could be made more open, if the Securities and Exchange Commission would allow “proxy access.”

Proxy access would permit shareholders to solicit votes for the election of their nominees by including the names and other relevant information about those nominees in their company’s annual proxy statement, and thus save the cost of sending additional documents. But so far the S.E.C. has said no to proxy access for the election of directors nominated by shareholders, though its new chairwoman, Mary Schapiro, said on Thursday that the commission will take up the issue in the coming months.

Echoing his thoughts in an earlier essay published in the Wall Street Journal, Icahn also argues that allowing shareholders to vote by simple majority to migrate a company from its state of incorporation to more shareholder-friendly states would stop many of the abuses:

With some exceptions, our public corporations are increasingly unable to compete globally, they pay excessive compensation to top brass and they are generally unaccountable to shareholders. The best hope to change this situation is to allow shareholders the power to move the state of incorporation of public companies from one state to another. For example, North Dakota passed a law in 2007 that, among other things, provides for proxy access and for the reimbursement of expenses to a shareholder who runs a successful proxy fight. A move to North Dakota would greatly advance shareholder rights for any company.

But under current state law shareholders can elect to move their company to another jurisdiction only if the existing board of directors approves such a move — and those incumbent boards will want to stay in the management-friendly states they already inhabit.

Federal legislation could correct this absurdity and permit shareholders to move the corporations they own to another state by a simple majority vote. Such legislation would override the restrictions of state laws that prevent such a change of jurisdiction unless approved by the board of directors. Most important, it would encourage the states, which profit from the tax revenues that flow from corporations, to compete with one another by reorienting their laws on corporate governance to benefit shareholders.

According to Icahn, a possible silver lining to the A.I.G. mess is that it will “alert Washington to the lamentable state of corporate governance in America:”

Our legislators will find – as I have as a shareholder who has waged many battles to get on corporate boards – that the rights of the shareholders are quite circumscribed.

It is time to remove the many devices that managements use to entrench their power, and give shareholders real power. The “ownership” rights that the government, as a shareholder, is now talking about are the same ones that activist shareholders have been demanding for years.

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