With over 20 years of experience in corporate governance and shareholder communications, Wes Hall has established himself as the preeminent leader in strategic shareholder advisory services and proxy solicitation. The Globe & Mail has called him one of the nation’s “most influential powerbrokers” and Canadian Business magazine named him one of the “most powerful business people in 2016”.
Wes founded Kingsdale Advisors in 2003 to provide clients with best-in-class services for communicating with shareholders and managing any transaction or event that requires a shareholder vote. Wes has since enhanced Kingsdale’s wide range of services by building a unique governance advisory practice, specializing in helping issuers meet the changing expectations of shareholders and their proxy advisors, and a strategic communications division.
Under Wes’ leadership Kingsdale has set itself apart by delivering an unparalleled track record of success for North America’s biggest names including: Barrick, BHP Billiton, Citigroup, Goldcorp, Talisman, Suncor, and Pershing Square. Wes has successfully completed the directors’ education program offered by the Institute of Corporate Directors (ICD) in partnership with the Rotman School of Management, University of Toronto.
Christopher P. Skroupa: Has the role of proxy advisors changed over the last few years?
Wes Hall: The role of Institutional Shareholders Services and Glass Lewis is constantly evolving and on high profile cases we are seeing increased scrutiny and a more interventionist approach. For example, the recent CIBC/PrivateBancorp deal where despite the revised offer, ISS still recommended voting against the transaction.
Good governance isn’t a point in time, it is a progression. Their policies are becoming stricter —tightening even in the middle of proxy season—and impacting the outcome of not only contested meetings, but even seemingly routine annual and special meetings. For example, since 2014, ISS has doubled the number of friendly transactions it has recommended against. It is very important then to have an upfront understanding of how the proxy advisors will view a proposed transaction, slate of directors, or other ballot items and tailor your approach accordingly.
For example, on a transaction the background section of the proxy statement is the main opportunity for a board to make its case. Showing the proxy advisors the process, who was leading the discussions, how many parties were spoken to, how negotiations went, and the downside risks associated with alternative courses of action, can increase their comfort level. They don’t care that this is a good transaction, they want to know the board tried to get the best possible transaction.
On a proxy fight, how responsive management has been to an activist, what defensive tactics have been employed, and what the likelihood is that the proposed goals and objectives of each side can be achieved, are critical questions to be answered. The purpose of thinking in advance about these issues goes beyond disclosure requirements and impacts the strategy employed from the outset.
Even on “routine” annual meetings too many issuers are surprised by the recommendations of proxy advisors. The fact is what may have passed their test last year, or even at the beginning of the proxy season, may not fly by the time your proxy statement is filed.
While issuers will have counsel to advise from a legal perspective and bankers to advise from a financial perspective, they should also have a strategic governance advisor who will approach things from a voting perspective. Issuers must ensure a deal isn’t derailed because of proxy advisors whose decisions are not always transparent and whose policies can move based on feedback from shareholder subscribers in real time. Your strategic advisor should also be able to alert you to any institutional holders with internal guidelines that may raise concerns that could have been addressed in advance. You shouldn’t have to see your vote fail to know the goalposts have moved.
Skroupa: Large investors are building in-house governance capacity. To what extent is this changing things and how can companies effectively navigate this new paradigm?
Hall: The rise of in-house governance teams has created a new paradigm for issuers and requires an extra layer of strategic design when considering proxy items. Some shareholders may subscribe to one or more proxy advisors, yet not follow their recommendations strictly. On some contentious issues, the proxy voting guidelines of certain institutional investors may be even more stringent, using the issues identified by the proxy advisors as “red flags” that require additional probing.
For example, look at equity plans, even though an equity plan may be structured to satisfy the guidelines of ISS, institutions may vote against it after conducting their own analysis and taking a harder line on elements such as burn rate, dilution, plan cost, or the “evergreen” reserve feature.
We also see institutional investors engage issuers on topics that proxy advisory firms may not focus on. On a shareholder by shareholder basis, we have been able to identify the governance policies of hundreds of institutional investors around the world. What is interesting is that these internal policies often represent the leading edge approach of the proxy advisors’ updated recommendations. As the clients of ISS and Glass Lewis, these large shareholders help set the agenda. Consider sustainability, environmental and social issues—while the benchmark guidelines of the proxy advisors may not cater to environmental and social issues, institutions will engage shareholders on these topics. Human rights issues, diversity, and tenure are some areas that have been on the voting policies of certain institutions for a while but have yet to become the benchmark policies of ISS and Glass Lewis. What your shareholders tell you may be an indicator of what proxy advisors will care about in the very near future.
Skroupa: The proxy advisors play a big role in contested situations, proxy fights and M&A where there is a dissident, what can boards do to manage their impact?
Hall: It is important to start with the end in mind. Know how proxy advisors will look at your situation and understand that if there is a public activist, even one playing “bumpitrage” on an announced deal, the proxy advisors will apply more scrutiny. Companies should start by completing a risk assessment of how shareholders will react to proxy advisors’ recommendations and the vote impact. As much as this will influence the design of your proxy statement, more importantly it will influence your overall strategy. In a proxy fight what tactics do ISS and Glass Lewis frown upon? In M&A what do they like to see in terms of strategic rationale, valuation, negotiation, and transaction process? These are important questions upfront because it will be difficult to go back and revisit once you realize the proxy advisors have an issue.
At its sole discretion, ISS will meet with management to hear their case and ask questions. This half hour to an hour meeting can make or break your vote. Management needs to spend time with advisors who know how the proxy advisors think to prepare. It is important to understand not only the specific points the proxy advisor is looking for you to hit on but also ensure you are coming across as confident and in command of the subject matter.
If proxy advisors do not agree, issuing a negative recommendation on a deal, issuers can then reach out to shareholders to provide their own perspective.
Skroupa: What if the proxy advisors go against you? Is all hope lost?
Hall: A negative recommendation is not the end of the line provided you are prepared. At the end of the day, shareholders are the ones companies have to convince and, in our experience, they will listen. More importantly, they will vote if you have the right message. This is why it is important to take a holistic approach to governance and consider the policies of your largest shareholders in addition to those of proxy advisors.
If you have the right strategic advisor, there is no reason why you should be surprised by a proxy advisor’s recommendation or how your largest shareholders will vote. A good advisor will tell you what the recommendation or vote will be and what you can do about it. In instances where negative recommendations are predicted, shareholder engagement should occur right away. From our experience, every shareholder is different and the personalities actually casting the vote, be it the portfolio manager or the governance specialist, are all different. The one who made the decision to buy your stock may not be the one casting the vote. While the investment team and portfolio managers may help, governance specialists at institutional investors are key influencers on proxy voting matters.
This is why it is extremely important to build and maintain a relationship with your shareholders. You don’t want them to feel like you are only reaching out because there is a problem and your scenario may not give you adequate time to build a rapport from scratch. You never know when you will need to cash in some personal capital. This is a call you need to be able to make—advisors can collect feedback and give you the straight goods—but you need to sell the investor on your position.
Skroupa: In your recent M&A report you make the point there is no such thing as a friendly deal anymore. What do you mean by that and what can be done?
Hall: The number of “friendly negotiated” M&A transactions that were voted against by ISS has been increasing steadily, but the concern goes beyond ISS; as soon as a deal is announced, third-parties are prepared to criticize the terms faster than ever before. What companies sometimes don’t appreciate is that an ISS or Glass Lewis client might call or email feedback on a deal and that will be grounds for the proxy advisors to take a deeper look. Even if the boards of two companies like a deal and recommend it, activists can halt a deal in its tracks or “bumpitrage” experts can force a higher price to be paid.
If boards have been engaging shareholders they should have a good sense of what issues they might be vulnerable on and what they will need to prove to shareholders to get the deal done. One of the biggest questions shareholders who have bought into the company’s long-term strategy want to know is why now? Be prepared to explain the downside risks and liquidity challenges of remaining independent. Lock-up agreements can help set the tone right out of the gate as can a structured reach out to the top 20-30 shareholders a soon as the deal is announced.
When you consider the time, money, and effort that goes into just getting to the announcement of a transaction, it makes sense to understand, consider, and prepare for the governance and shareholder risks that may come after the announcement.
Skroupa: Every proxy fight I see the activist calls out the board for failing governance practices. Are poor governance practices the thin edge of the wedge for activism?
Hall: Governance concerns act as a springboard for activists and are symbolic of a board who is or is not aligned with shareholders. In proxy contests, governance shortcomings become governance failures and their amplification may make or break a campaign. Especially when governance concerns relate to compensation schemes that reward management that does not deliver shareholder value.
One of the ironies we see is that for all of the underperformance issues, governance concerns can be the easiest to correct yet boards are often reluctant to do so, possibly seeing correction as an admission they have made an error. It is far easier to alter the board dynamic that to fix a structural of strategic matter.
Poor shareholder returns, often the genesis of most proxy contests, are attributed to a failed strategy or execution of the strategy. But why did they fail? Who was in charge and what were their interests? Activists will try to show boards were not aligned with shareholders, not acting in their best interests, and not focused on the things that matter most to them. Proxy fights aren’t just about a company’s performance, they are about who you trust to turn things around.
That’s why we always advise boards to be on top of governance concerns—review proxy advisors’ reports and concerns raised by these third parties, then do something about them. Don’t wait until a vote is imminent to try to turn things around. Take action on governance concerns and, if you aren’t prepared to, make sure key shareholders understand why.
Sometimes, the concerns raised by the proxy advisors are not straightforward. We help issuers understand the concerns of proxy advisors and investors and advise on how such concerns can be alleviated while respecting what the company is trying to do. Regular governance triage and remedy are necessary as last minute reaction to activists’ call on governance reform may be viewed as “too late” by proxy advisors.
Skroupa: What are the top governance issues you think boards should be focused on dealing with this year?
Hall: We predict that boards will continue to be focused on executive compensation issues as shareholder scrutiny on excessive compensation and pay for performance alignment will remain high. We also expect environmental and social issues to be at the top of mind for investors as evidenced by recent shareholder proposals—Glass Lewis, has already started to integrate environmental and social data into their reports and analyses. ISS also focuses on environmental and social issues in some of their specialized reports. Boards should be wary not only of environmental and social controversies related to their companies, but how these risks are managed and whether there is appropriate oversight. Much of Glass Lewis’ scoring is based on the gross risk of the industry. If you have tight control over these, you need your story out there.
Adoption or amendment of proxy access, transparency on government lobbying and political contributions, and diversity issues will also present challenges to boards in the coming years and require an understanding of the governance views of your largest shareholders to navigate effectively.