The Activist Investor Blog
The Activist Investor Blog
The Deal Professor's GPA Plummets
Last week, Steven Davidoff Solomon, the Deal Professor at the New York Times DealBook, earned a ‘C’ for his clumsy takedown of the Allergan-Valeant-Pershing Square situation. He did worse this week, and earns a ‘D’ for a poorly-reported, if not outright biased account of “gadfly” shareholders.
The problem starts with the title: “Grappling With the Cost of Corporate Gadflies”, and extends to the main point:
...[T]hese proposals [cost] companies tens of millions of dollars and creat[e] big fights in the courts and at the SEC...Yet, these [shareholders] seldom own more than a few hundred shares of the companies they challenge... The question is whether these proposals are doing more harm than good for all the shareholders.
Solomon then lights into John Chevedden, William Steiner, and James McRitchie for running a “personal crusade of a few against corporate America.” He advocates for a “stop [to] the perpetual reintroduction of proposals that ... never pass[].”
Let’s begin with basic language. One dictionary defines “gadfly” as “an annoying person, especially one who provokes others into action by criticism.” These three mostly annoy CEOs, while investors either like what they do, or don’t really know about them. As far as I know, they don’t seek to annoy CEOs, and they don’t call themselves gadflies. Let’s use a more fair and accurate term, like “shareholder”.
We also object to the idea that companies need to “grapple” with its own investors.
Solomon then levels two criticisms against these three. Their proposals cost companies “tens of millions of dollars” and “most of [their] proposals have failed.”
Costs
As for the costs to companies:
...companies spent millions dealing with these proposals. One estimate puts companies’ costs at $87,000 for each proposal, or more than $90 million a year, meaning that these three activists are costing companies tens of millions of dollars.
He links to a dead page at the US Chamber of Commerce website. We traced the evidence to a rudimentary survey that the SEC undertook in 1997.
What to make of the $87,000 figure? Based on a review of the survey methodology, it’s likely biased high. The survey helped the SEC design rules for excluding shareholder proposals, so companies had some incentive to overstate these costs. The figure also does not include companies that reported zero costs, of which there are many, and the inclusion of which would lower the figure.
That cost consists of $37,000 for determining whether to include a proposal, and $50,000 for actually including it. The $50,000 figure covers multiple proposals at a given company, so the “per-proposal” figure would be lower. It also seems absurd that it would cost that much to edit and print a few extra pages in an otherwise lengthy document. Besides, companies spend millions of dollars on annual meeting materials. The cost of including shareholder proposals pales in comparison.
What about the $37,000 cost to determine whether to include a proposal? Companies don’t have to spend that money, but choose to. It represents the cost of opposing a shareholder proposal, rather than the cost of including it. Viewed this way, we should count the cost of “big fights in the courts and at the SEC.” Alternatively, companies could just allow whatever shareholders send them, and spend a very small amount of time verifying share ownership. No need to pick over proposals carefully, and litigate these matters.
Even if it really costs as much as he says, it might be worth it. Ask Allergan shareholders, who now have a special meeting bylaw (albeit flawed), and a chance to gain a decent premium, thanks to John Chevedden.
Success Rate
As for their success rate, it’s low, but not nearly as bad as Solomon portrays it. He claims “...most of the proposals this year have failed.” For all three shareholders in 2014, only six out of 75 proposals won a majority of votes, or 8%.
Yet, for the period 2006-2014, they won a majority for 66 proposals out of 486 proposals, or 14%. That success rate is close to the overall success rate for all proposers. For 2014, Ernst & Young reports it at 15%, while Alliance Advisors reports it at 17%.
It makes no sense to limit proposals because they fail, at least if investors don’t object. And, we haven’t heard that investors have tired of seeing the same proposal repeatedly. If success rate becomes the basis for limiting proposals, this (flawed) limit will need to apply to all investors, not just individuals with small holdings.
Consider the Source(s)
This hit piece disturbs us because Solomon just didn’t do much homework. Either that, or he began with a dim view of these shareholders and only sought to confirm it.
His main source is a report from the Manhattan Institute, a staunch defender of corporate interests. His source for costs is the US Chamber of Commerce, and we know what they think of investors.
He evidently interviewed the three shareholders, and Googled some profiles of each. Did he talk to any institutional investors? You know, the ones who have to wade through the morass of the same proposals in a company’s proxy? We think we know that answer.
Look, he could have a lot to work with. There’s significant debate about the impact of improved corp gov on equity value. These three shareholders contribute in a small way to improved corp gov, with uncertain impact on share prices.
And, we’re no fan of gadfly investors, in the truest sense of the word. We’ve come out strongly against socially-responsible investing, and against significant outreach to individual investors. Solomon could easily go after them.
These three shareholders focus mostly on important if arcane corp gov mechanics. They serve a useful role, at minimal true cost to companies and their investors. If they want to act as gadflies, and provoke a few corporations into changing their entrenching corp gov through criticism with shareholder proposals, then we investors should support them.
Solomon should find someone else to pick on, and earn a higher grade elsewhere.
Thursday, August 21, 2014