The Activist Investor Blog
The Activist Investor Blog
How Powerful are Proxy Advisors?
Anyone else catch this interesting artifact of the recent tiff between Len Riggio and Ron Burkle?
So, what made the difference [in the election]? ... Vanguard, which holds about one million shares, and BlackRock, which holds about 250,000 to 350,000 shares, normally follow recommendations from Institutional Shareholder Services. But in this case they went against I.S.S.’s recommendation, which favored the Burkle slate, and backed Mr. Riggio instead.
Len Riggio is of course the CEO and Chairman of Barnes & Noble (BKS). Ron Burkle, one of the original FOBs (Friends of Bill, Clinton) runs Yucaipa Companies, which owns about 20% of Barnes & Noble. Ron dislikes how Len runs the company, challenged Len to an election last month, and lost.
Steven Davidoff, who writes the superb Deal Professor blog in the New York Times Deal Book, uncovered the interesting vote in his insightful analysis (excerpted above) of how Len snatched victory from the jaws of defeat. Vanguard and BlackRock apparently made the difference.
ISS came down hard on BKS:
...based on BKS’ deteriorating operating performance, poor shareholder return, less-than-enthusiastic analyst recommendations, inadequate transparency into and disclosure on a very large related-party [college bookstores] transaction which appears to have exacerbated performance problems, and significant concerns about unusual pay practices, we believe [Yucaipa has] demonstrated a compelling case that change in the BKS board is warranted.
Notably, other proxy advisors (Glass Lewis, Egan Jones, and ProxyGovernance) supported the company.
So, why did Vanguard and BlackRock vote for Len? How often do they follow ISS, anyway?
Neither Vanguard nor BlackRock explained their vote, or indeed even disclosed it (Steven Davidoff figured it out on his own). But, we know a little about how they vote generally, and how they have voted in the past on Barnes & Noble. Based on that record, this outcome won’t surprise anyone. It might disappoint conscientious activist investors. It does show the limits to ISS’ power, which we have discussed previously.
Both Vanguard and BlackRock follow detailed voting policies, which resemble those of ISS and pay homage to all the tenets of good governance. The incumbent directors at Barnes & Noble do comply with all of the relevant policies. In the absence of a compelling case against, the two investors would support them, and not Burkle’s nominees.
Burkle also sought to make that compelling case, in detailed and elaborate presentations and letters to all investors. To no avail, though, with Vanguard and BlackRock. Both firms have their own sizable proxy research departments. On a controversial matter such as this, with dueling strategies and analyses from incumbents and challengers, their policies also state explicitly that they won’t necessarily follow proxy advisors’ recommendations.
Furthermore, only once, in 2008, did Vanguard oppose a Barnes & Noble director, probably because that person did not attend at least 75% of the board and committee meetings. (BlackRock’s Form N-PX does not have any voting records for Barnes & Noble.)
Thus, we don’t know why, exactly, these two firms preferred Len’s case to Ron’s. Their finely-crafted policies don’t provide any guidance in a controversial situation such as this. Apparently they made a judgement call in Len’s favor.
This vote shouldn’t really shock anyone. Vanguard generally supports management: they voted for incumbents 91% of the time last year. They also favored poison pills 92% of the time. (Again, BlackRock does not compile its votes for investors to review.)
At least one element of this situation should trouble activist investors. Burkle also challenged the poison pill at Barnes & Noble. ISS supported that challenge, and recommended that investors vote to eliminate it. Policies at both Vanguard and BlackRock also generally oppose poison pills. Yet, both firms supported this pill.
So, Barnes & Noble “won”, and Yucaipa and ISS “lost” this time, thanks to Vanguard and BlackRock. Vanguard even has a reputation as more aligned with activist investors. On situations that require more than just following policy, perhaps ISS doesn’t quite have the pull with investors that corporate interests think they do.
Monday, October 11, 2010