The Activist Investor Blog
The Activist Investor Blog
What Investors Should Know About the
Shareholder Rights Project
Most PMs tend to ignore much of the current governance scene, and that’s ok. It gets pretty arcane and wonky, and feels quite distant from the usual job of researching, picking, and trading winning stocks.
The Shareholder Rights Project at Harvard Law School is a little different. Lately it has concerned itself with an important governance problem, that of classified or staggered BoD terms, with significant impact and benefit to all investors. We just received their year-end update, so we thought we’d explain what it does and why it matters.
Staggered Boards
...sounds like sailing jargon, or maybe an indie band. If you already know about them, by all means skip to the next section.
If not, it refers to BoDs with individual director terms that do not all expire at the same time. They are also called classified terms because shareholders vote on a subset of the BoD, or a class, each annual meeting. So, for an eight-person BoD, the “Class A” cohort might consist of three directors, Class B another three, and Class C the remaining two. Shareholders vote on only one class each year.
Companies argue that classified BoD terms provide continuity, since the entire BoD does not change over at a given time. Shareholders think it merely entrenches the BoD, and permits investors to replace at most a minority of the BoD at any one annual meeting. Realistically, companies like them for the reason that investors don’t - they allow comfortable directors to keep their jobs. And, realistically, BoDs turn over so seldom that continuity becomes a problem, rather than a virtue.
Why Target Staggered Boards?
Because among governance problems, it’s one of the biggest. No doubt one or another portfolio company has frustrated you because you could only change the BoD piecemeal. This structure has likely dissuaded you, and many other PMs, from pursuing an activist project at one or another portfolio company. Of course, while they won’t say so out loud, executives think it should do exactly that.
Importantly, staggered boards also lower shareholder value. Among all the possible governance reforms, declassifying a BoD appears to have as much or more value as any other in terms of shareholder return. Serious academic work, including a formal model and this spirited defense of the original analysis, provides solid evidence of this impact.
SRP at HLS
The SRP mission statement broadly commits it to “improve corporate governance at publicly traded companies.” Since its founding in 2012, its sole project has advocated for BoD declassification at large US public companies.
Prof. Lucian Bebchuk of HLS founded the SRP as a clinical program. In this way it provides HLS students practical experience with securities law, similar to how other clinical programs provide practical experience with litigation, tax law, or other legal areas.
Prof. Bebchuk also led the academic research on the impact of classified BoDs mentioned above. Others have confirmed the findings.
The SRP works with (for?) eight institutional investors - seven US public pension funds and one foundation - all with an abiding interest in improving corporate governance. It advises them on proposals at their portfolio companies and represents them in negotiations with these companies.
Abundant Progress
In 2012 and 2013, the eight investors and the SRP targeted 129 Fortune 500 and S&P 500 companies for declassifying their BoD terms. They succeeded at 106 of those companies. For 2014, they have identified another 31 companies for this attention.
Most of the success arises from settlements with the companies. About one-half of the companies held a vote on the declassification proposal. The eight investors and SRP won almost all of these votes with an average of around 80% of the votes cast.
If this program succeeds in 2014 to the same extent it did in 2012 and 2013, it will have declassified almost all of the BoDs at Fortune 500 and S&P 500 companies that had staggered BoDs.
And, Some Critics
Not surprisingly, this effort has attracted some criticism, principally from Marty Lipton. His staunch and blithe defense of corporate interests led him to level two charges against the project, in a blog post, “The Shareholder Rights Project is Wrong”
❖There is “no persuasive evidence that declassifying boards enhance stockholder value”
❖He objects to using a clinical law program in this way.
In turn, Prof. Bebchuk responds in “Wachtell Lipton Was Wrong About the Shareholder Rights Project.” It’s interesting, and worth a read, to compare corporate attorney (and noted lackey) Lipton’s polemical diatribe with academic Bebchuk’s dispassionate yet pointed defense of the program.
For our part, we love that they seek to reform board classification, rather than trivial subjects like majority voting or CEO and Chair separation. We hope that smaller companies take the lead from these large ones. We also hope that SRP moves on to even more critical subjects, such as proxy access and poison pills, when it wraps up this one.
Tuesday, December 10, 2013