In this latest episode of D.F. King’s Proxy Insights Podcast, D.F. King Senior Managing Director, Tom Germinario, is joined by Barrett Golden, Partner, Joele Frank; Elina Tetelbaum, Partner, Wachtell, Lipton; and Damien Fisher, Senior Managing Director, Evercore. Tune in as they discuss 2024 trends in shareholder activism, activist approaches and tactics, as well as what makes a company vulnerable to activism. Also covered are best practices for identifying, preparing for and responding to activists before they arrive on your doorstep.
See below for full transcript of the video. There are also links to jump ahead to a specific section:
Chapter 1: What are some recent trends in activists approaches and tactics?
Chapter 2: What makes a company vulnerable to activism?
Chapter 3: What should a company do to prepare for activism before it happens?
Chapter 4: Growing trend towards targeting CEOs
Chapter 5: What are some of the benefits of a StockWatch or ownership intelligence service?
Chapter 6: What does the first 24-hours that a company receives an approach from an activist look like?
Chapter 9: Are there any important trends in settlements?
Chapter 10: What are some of the lessons learned from high-profile situations from the proxy season?
What are some recent trends in activists approaches and tactics?
Tom Germinario: We'll start it off talking about trends. 2024 has been an interesting, if not tumultuous, year in the proxy industry. There's been high-profile proxy fights or situations at Walt Disney, at Norfolk Southern, Masimo Corp, Starbucks, Southwest Airlines. And just when you thought things were calming down a bit, Mantle Ridge announces a big position in Air Products. Elliott announced a big position in Honeywell. So the environment is extremely busy. These battles and there's others, but they've impacted all industries, entertainment industry, railroad industry, medical devices, healthcare, specialty chemicals, basic materials and the airline industry.
New campaigns have reached a record high. There were 147 new campaigns in the first half of 2024. That's up 29% from the five-year average, And that's up 7% from the 2023 first half statistics. Europe and North America remain active, and the Asia Pacific saw a significant increase in activism. So, there's a lot going on and all the people at the table have a big role in all of that. So, let's kick it off by talking about trends. Damien, we'll start with you...Any trends in activist approaches and tactics that you'd like to mention?
Damien Fisher: Sure. Thanks Tom. Look, as you said, the general trend has been more campaigns and they're coming in all shapes and sizes, and this is really an all year-round event. We used to think, or we tend to think about proxy season and the annual meeting, but there are situations where the funds come in the day after the annual meeting, waiting for next year's meeting. We've had situations where they nominate directors when the window is closed for the following year's meeting. So, it's really an all year-round event. And with the campaign volume up, there are just more funds looking at company targets. There are now second and third generation funds out there, which are portfolio managers who have left some of the bigger brand name funds that you've all read about, and started their own funds, who are aggressively looking for targets to make their name and get their name out there.
So, it's really kind of a new name or a new situation every other day. I would say generally shareholders are becoming more vocal. And it's not just the hedge funds. I think generally shareholders are emboldened to make their voices heard. It's not always public, but we have situations too where institutional shareholders are not happy with companies and are writing letters to the companies. And then lastly, I think it's spread. U.S. has obviously been the home turf for this, but we're spending a lot of time in Europe. There are a lot of the U.S. funds who are looking at Europe right now with valuation dislocations across borders, where you have U.S. multiples and you have the European companies that just don't trade at those kind of valuations. And I think we're going to see more activity over there.
Tom Germinario: Awesome. Any additional comments, Barrett?
Barrett Golden: I would pick up on something that Damien said. Campaigns are not just starting earlier, they're starting louder. Elliott in particular these past few months has launched campaigns, I call them ambush campaigns, where there has been no prior engagement at all. You have activists who said, "Hey, I'm going to be constructive." It's not constructive to launch a 12-page letter for the first time ever and never have called the company. So that's increasing a lot. The number of CEOs that have been targeted is up six times, I think, since 2016. So, while not new, it's accelerating for sure. And it's not just investors, long investors that are public. We've seen a lot of campaigns, Southwest in particular, for example, where unions have been very vocal on coming out on different sides of the table. A union ran a proxy fight on UPC with Starbucks. So, in addition to labor, you've got politicians that are coming out. It's a much more difficult communications environment for PR firms, which is where I sit.
Elina Tetelbaum: What I would add to that is not only are they starting earlier, not only are they starting louder, but they're lasting longer. And I think it used to be you could have an activist encounter, have a resolution, and get lasting peace for sometimes multiple years, a multi-year standstill. Now you maybe don't even have a standstill or you have bought peace for one proxy cycle.
And that means that, even if you win a battle or find peace, there's going to be so much scrutiny on how you handle the coming year because they're coming back for round two. So that's a big trend. And another point I'll make that we will talk, I'm sure, a lot about the settlement activity, but the nature of the director candidates has also changed. And not all activists, but many have made inroads to more quality directors than I think has been the case historically. I think it used to be that if you served on an activist slate, you might not get invited to the party anymore. But now very legitimate people are serving on these slates, and I think that has actually changed the calculus for boards when evaluating what kind of resolution could we come to terms with, with activists.
Tom Germinario: It speaks to all of the preparation that companies need to have. And if you're not ready for these ambushes, it speaks to doing that self-analysis and being ready as best you possibly can.
What makes a company vulnerable to activism?
Tom Germinario: Let's move into, for all of our mutual clients, what makes a company vulnerable to activism? And just to set that up, I think years ago, the thesis starts with an underperforming stock and maybe some problems on the board, but now it’s TSR and relative performance, relative margin performance, and the financial ratios go on and on in terms of revenue operating income, segment operating income, leverage, so many financial stats being thrown at companies and peer comparisons. So, if companies are underperforming their peers, they’re really vulnerable So Damien, again, anything jump out at you as vulnerabilities?
Damien Fisher: Sure. Thanks though. I think on the banking side we have these evaluation frameworks to assess vulnerability across TSRs, operational performance, financial performance and other metrics. It's important to do that as a housekeeping matter, that it's really an important function to bring ideas, to float ideas to the surface about areas where you could be doing something proactively. And we want to have that kind of discussion with our clients. One-, three- and five-year TSR is a very famous framework, but it can be as much as a bad earnings call, and the stock goes down 10, 15% and creates an entry point for a shareholder just to get in at a good value, where there's perhaps perceived more upside than not. The other thing I would say is very simple. Is there a buyer for the business, and is there a perceived M&A transaction here that perhaps the company has not been engaging with or could engage with?
So, you don't necessarily have to have bad performance if there's a willing buyer out there. And this creates a dynamic where you can have a business that's doing pretty well, people are performing, people are incentivizing, getting paid to deliver performance for shareholders. But if there's an M&A premium out there, a hedge fund could try and capitalize on that and create some momentum for a transaction. The other thing which companies often underestimate is when you're announcing a transaction, that it can create a dislocation of a share price. And I don't think bankers do a good job at working with clients to really communicate the benefits and the value creation potential for a transaction.
Markets tend, we're back in an environment where acquirer stock prices go down and seller prices typically go up. That had changed for a while and in that environment, again, if you have a lot of stock in the deal or the messaging on the value creation not communicated well, it creates a dislocation and an entry point for people to take advantage of that. And then the last thing, which is a tricky subject, which is board qualification. It's somewhere in the evaluation framework, but we're going to talk about this. Certain director profiles are easier targets than others. And there's a very clear correlation between targeted companies and amount of tenure to vulnerable directors and we'll get into that.
Barrett Golden: I would build on this concept of value. Certainly an undervalued company is vulnerable, but a company that is slow to address that vulnerability is even more vulnerable. We hear a lot of our clients where they say, "Well, geez, our board of directors has been thinking about that already." An activist often doesn't come to the table with a novel idea. They come to the table with an idea that can be activated faster or more aggressively. And if a board is slow to address these vulnerabilities, even if they had the idea first, it creates an opening for the activist. The other big point is credibility. If a management team doesn't have credibility with investors, and sometimes that can mean a relationship. Doesn't have to actually mean credibility. Then they're vulnerable. Activists do a really good job of building relationships with shareholders and it's not just in that particular situation, it's every situation that they've already been involved in. And if a board and a management team don't have a sober view on what their shareholders think, then they have a problem.
What should a company do to prepare for activism before it happens?
Tom Germinario: What should a company do to prepare for activism before they have an activist in the stock? Barrett, right up your alley. Why don't you lead us off on this one?
Barrett Golden: 100%. I'll go back to what I just said. Know who your shareholders are, know what they think and know what their expectations are. And that's approaching a meeting, not with let me tell you what we're doing, but tell me what your views are? What are you hearing that you think I'm not? And it's understanding what they think, not just having a script around it. There's also good hygiene things that we advise our clients to do. In the era of universal proxy where every director is listed on the same footing as the activist, your slate is only as strong as your weakest candidate. So don't wait for a proxy fight to start advocating and building credibility around your directors. And there are creative ways to do that. We're seeing more clients now prepare videos not just about, "Hi, my name is Barrett Golden." But to speak more specifically around why their experience is relevant, not just what their names and titles are.
Elina Tetelbaum: The more a company can be working with its board as an asset, and viewing its board as a strategic asset in its strategic initiatives, the more unified that board will be. Not just because they're collegial and they know each other, but because they have a shared vision and have had hard discussions in the boardroom about why they are doing certain things and why they're not. I think keeping the board united in the face of activism is perhaps priority number one that we, as advisors, try and help companies do. Because if you really think about what is actually the main tool of activism, it is to use the media and the threat of public embarrassment essentially to try and persuade directors that their seats are on the line if they don't do X, Y, or Z. when much of what we do is try and make sure that directors understand the activist is not actually dictating the timeline. They can't actually dictate the decisions. All they can do successfully is create divisions in the boardroom, or divide management from the board so that mistrust sows into some kind of bad judgment that is in the activist's best interest, but is not in the interests of all of the other shareholders. And so, what we do on a clear day is we want the board to be educated about activist tactics. This is what they try and do, this is how they try and do it. This is how they might approach you. Knowing that board is well-advised so they don't have to worry that, if something happens, who at the management is going to be there to make sure that the board is protected. And so doing that work and that education with directors when they're not under a threat really pays dividends if the day should come that they are in fact in the spotlight.
Barrett Golden: I want to build on that for just a second because one of the mistakes I have seen even my own clients make when we get brought in to help them, is that so much of their investor rationale is focused on what they've done and not on where they're going. And I think activists do a really good job of saying why everything you've done has been bad, but then painting the picture of, wow, if you just follow my suggestions, it's going to be even better. And going back to the message and what you can be doing in advance, yes, the track record matters, because it builds the credibility. But if you want to win the vote, you have to have the vision.
Tom Germinario: Absolutely. Yeah, and I would add from D.F. King's perspective that it's really important companies take the regular annual meeting as routine, but it's really important to be engaging with the stockholders, to understand the shareholder base, to hear the themes coming from investors. We very often debrief clients and say, what are you hearing? What are people saying when they call into IR? Are there any disappointment, any themes of capital allocation, anything like that that you could pick up?
You don't want to have a situation where there's an activist and the first time a company is engaging with Blackrock, Vanguard and State Street is they haven't done it regularly and it's awkward for them. We see every day that clients have built that relationship with the institutional investors. So, you just feel the trust from the annual engagement and the investors get the impression that this company is really thoughtful in their approach to everything, and the board is thoughtful in their approach. So, there's other things to watch for, look for low votes of directors or committees, or just any sign of trouble. But one of the main things is to listen to what's coming into IR in terms of any disappointment with the performance. So great.
Damien Fisher: I think you all made great points. As financial advisors, we have a simple piece of advice is get your share price up. And it sounds very simple and I only mean it half-jokingly, but performance obviously helps. But there's an important thing to remember, which is change takes time. If the company is in a six cycle that's not helping them, or if there are challenges, structural challenges against the business, it takes time to fix that kind of performance. And so, six months, 12 months, 18 months can be required in order to fix one of these valuation issues with a transaction. And it all calls for really being proactive about this and thinking through it. And then I want to echo one point you said, the relationships. Just like these strategic changes take time, building real relationships take time. We say to our clients, did you send a thank you note to your investors at the end of the year saying thank you for your investment? For them to feel that these are good people that they can trust in a tricky situation. Some things are complicated, but some things are pretty easy.
Growing trend towards targeting CEOs
Tom Germinario: Well, here’s an interesting trend. Some activist campaigns do not target the CEO and some do. There's a growing trend towards targeting CEOs. So Barrett, why don't you start us off on this one?
Barrett Golden: Right, so I mentioned earlier that CEO change has six times greater rate this past year than in 2016. But even more of a wow for me, Starboard front page activists, 14 of 28 of its campaigns have resulted in a CEO change. Elliott has an equally impressive stat over the past couple of years. I think it's 13 CEOs over the past two years. Coming in with the CEO change is like taking a sledgehammer to the company. I mean, that is big change. That's not two directors on a board, even if they're replacements and not expansions. It's not a committee, which a lot of companies push back on for a variety of reasons. But CEO change is big and it doesn't always happen at the meeting.
Whenever there's a CEO change on the table, you have to be prepared for the dossier to show up in the boardroom. And some activists are really active and aggressive in putting together that dossier. Companies have to be prepared for the dossier to come into the boardroom, because there's been an investigation in some way or shape or form run by the activists. And it puts the boards in a very difficult position. A recent example of that would've been Norfolk Southern. The board went to the mat for the CEO through that fight. After the fight was over, it turns out that the CEO was having an inappropriate relationship with the general counsel, and the board had to make a decision then after having defended the CEO for months.
Tom Germinario: Damien, any comments on that before I do?
Damien Fisher: Yeah, look, a CEO targeting campaign is hugely destabilizing, to echo what you said, Barrett. And even if the board might be considering CEO change, they have to back the current CEO because the minute they don't-
Barrett Golden: 100%.
Damien Fisher: ... They're not going to find a candidate that's qualified, that wants to step into the situation. And the minute you don't, you've conceded. So while I'm very sensitive to that you have to be careful because you don't know what's going to show up. Tactically it's a really important decision. It's very destabilizing and of course it's a huge catalyst for M&A.
Elina Tetelbaum: I think that activists are trying to be very careful because even if it's unspoken, if you're attacking a company and its operations and the way that it makes decisions, often it's an implicit issue with the CEO. But where they make it explicit, they're actually setting a higher bar for themselves to have a solution. So, part of how shareholders and proxy advisors look at the slates the activists propose in those situations is, do you in fact have the person who could day one step into the CEO's shoes, even if it's not on a permanent basis? They want to know that you're not just here identifying problems, you actually would be offering a solution. I think most of us can kind of look at slates and say, ah, that's the person that they're thinking is going to be potentially the CEO successor replacement.
Barrett Golden: Yeah. One thing I want to jump in very quickly on the CEO campaigns is that, not only have there been campaigns targeting CEOs, but there have been campaigns built around lack of succession plans this past year. And I was talking with Cristiano, who runs ISS in fights and issues recommendations, and he said, ISS, in those fights, are going to be looking for very specific plans from the company around their succession. And it's a much level of greater detail than what typically shows up in the proxy, which is okay, this is something that the board regularly considers and we examine candidates. So, as companies are thinking about vulnerabilities, what would they say about their succession plan if they had to go a level deeper beyond what's typical in a proxy?
Tom Germinario: All great points. What I would add to it is the current trends may embolden some activists to go more forcefully after CEOs, so we may see this trend continue. But one of the flip side arguments is that clearly, and some of the voting results from 2024 show, that the investors are very careful or tread carefully before they vote against the CEO change, because of the destabilizing point. When you look at some of the fights this year, some of the large top 10 investors would vote for large scale change on the board but would not vote against the CEO. It's an interesting dynamic that'll, I'm sure will continue. Keep us all busy.
Barrett Golden: High hurdle.
Damien Fisher: Yeah, during covid it was a big no to go after the CEO because companies were so vulnerable and fragile. And this is a resurgence of a theme that has been alive and well for a long time, but perhaps was forgotten for a few years.
Tom Germinario: Yeah. Yeah. I mean it's evident when you look at the voting results from 2024, including in some campaigns where you think they would vote the CEO out, and one of the major holders would not vote against the CEO.
Elina Tetelbaum: But even if of course they don't lose their seat, or even if they don't lose the immediate reelection, the point I had made in the beginning is because sometimes there's round two, it's so important in that first go around to not over promise, or make promises that you think are going to win you the proxy fight and keep your job, because then you may not have it for long.
Barrett Golden: That's the credibility. That's the vulnerability.
What are some of the benefits of a StockWatch or ownership intelligence service?
Tom Germinario: Absolutely. Okay, so let's move on to the benefits of having a stock watch service, or an ownership intelligence service. I think in today's environment and all of the best practices, all the law firms and the investment banks recommend, is for companies to be analyzing the shareholder base on a clear day, right? To understand the trading activity if any long onlys are selling down or building up, if there's any hedge fund accumulation. So, it's imperative to be watching the shareholder base and the changes. It's not a hundred percent exact science, but there's settlement activity. You look at the settlement activity of the custodian banks and brokers, and knowledge of where the large investors hold. And you look for who's selling and who's buying.
We also look at prime brokers for hedge fund accumulation. And part of the challenge is that many of these investors hold in the same place, but even if you do not know 100% the identity of someone who's accumulating, chances are you can see hedge fund accumulating at the prime brokers and things like that. You also look for buildup of positions and if the positions stick. So, if accumulation sticks, it might be a sign of trouble. If the accumulation is there and then gone in the next day or two, it's likely stock loan activity. This type of service also monitors news on why did a company's stock go up 5% today? There might be news in the sector that is affecting the stock price. So it's a great tool and it's a necessary tool to have on a clear day, before this activist accumulation.
Elina Tetelbaum: I completely agree. I mean, I think we've all said that sometimes the activists are hiding in plain sight. They're in fact screaming that they're there, right? You read about it in the news. But that's not always their preferred path. And sometimes their entire economic model is premised on buying before anyone knows that they're there, so that the stock price doesn't run up on their presence. And so, they do try and do this behind the scenes, and it is hugely valuable when you have sophisticated stock watch companies that of course, like D.F. King, that allows us, as advisors, to give a company a heads-up that this might be happening. Because those first 24 hours, which we'll talk about, to know those few days ahead of time, to have known when you get that IR inbound. Oh, we knew this was coming, and because of that we took X, Y, and Z step. We got our board on a higher alert. We told them not to answer their phone calls if they don't recognize it. All these things that you get to do because you had a good tip.
Barrett Golden: Yeah. Look, we are PR, so we're often the last people to be brought in.
Elina Tetelbaum: Or the first.
Barrett Golden: But when we are brought in, the first questions I ask are, who are your financial advisors? Who are your legal advisors? And who's doing stock watch? Because the work you do is so valuable because there aren't footsteps before. Where are the derivative positions? And it can be a catalyst for action and a motivating data point for companies like, okay, let's move faster on this initiative because we know somebody is around.
Damien Fisher: It's really important. Positions are harder to detect. The U.S. disclosure rules are terrible. And to have a sense, as you said, get a little bit of a heads-up or advance notes. We had a situation where the activists, the hedge fund, bought a nearly 10% block from an institution, had 10% themselves and showed up with 20% stake the next day. This can happen really fast. And so, we might not always catch the 1% or sub 1% accumulations, but the big ones you got to know and you got to move really, really quickly, because you can't hand over 20% of your company.
What does the first 24 hours that a company receives an approach from an activist look like?
Tom Germinario: Let's shift to the first 24 hours of an approach from an activist. What does that look like? Lina, I'll start with you.
Elina Tetelbaum: Well, I think one main point is that it really looks and feels different at every company, because even though many of the things we're saying are general, every company has its own dynamics, has its own people, has its own strategy. And also, every activist approach is a little bit different, right? It matters. Was it a email that went to the head of IR for a 30-minute chat? Is it an email from the principal of the activist emailing the chair of the board directly, asking for a meeting in the next week? Is it a public letter that gets issued without any heads up? Each of those first 24 hours feels a little different, but we actually handle all of them pretty much the same way, which is the way we handle every part of an activist situation, which is together as a team making the best judgments we can with the information we have.
We share information across the PR, legal, proxy soliciting, and financial advisor functions. And there's so much richness of intel in terms of what other things do we know that this activist has going on? What have they done before? What is their particular playbook? What do we know that the company is already planning to do? What do we know that the company has heard from its existing investors? We all have pieces of the puzzle, and part of why I certainly love what I do is because it really is a team sport, and we don't take anything for granted.
Even basic decisions like do you take this meeting? Who takes this meeting? When do you reply? That's something we really do think about very deeply, because we want the engagement to start off on the right foot. And I'll conclude this part by saying it's not that anything is won or lost in that 24 hours, but there are reactions that a company can have, whether it's too reflexive, a public position, or an overly defensive position across the activist where your words just come back to haunt you. That's not where you want to start. And the chess and the tactics kind of evolve from the way you handle those first 24 hours.
Tom Germinario: Barrett?
Barrett Golden: I'll build on Lina because she's right. Strategic agreement is where a lot of decisions and energy is placed on the first 24 hours. But there's also tactical things we do, and it depends on how it shakes out. So more often than not, activists are leaking their positions first on the Sunday night to the Wall Street Journal. So, the first time a company knows that an activist is there, or getting ready to go public, is because the Wall Street Journal calls on Sunday night and says, "Hey, I hear so-and-so has a large position and will be advocating for spinoff of these assets. Do you have comment?" Right?
So, then it's very quickly the company management, the advisor team gets on the phone and we decide, do we say something to the journal? Is it on the record? What do we say? And there are a lot of inputs in that decision. Do we know what the activist really wants? Do we know what our shareholders think about it? Has the board formed a view on it? But there are a lot of inputs and you can't lose sight of the other stakeholders either. I mean, these are companies with employees, with customers, with partners, and a lot of consideration goes into how you deal with those stakeholders.
Tom Germinario: Absolutely. Damien, any thoughts?
Damien Fisher: Look, if you're a company, I would just say you don't want to be interviewing your defense advisor after the first 24 hours. Terrible situation to be in. And the bankers that don't get picked, they go off and do other things. That's not a great place to be. So, get your team in place early and hopefully be prepared. But most of the situations we get brought into, we're getting brought in and the companies are not prepared. And you don't want to be reactive and you have to evaluate what your assets are in that situation. It might be two or three research analysts who are really positive on the company. You can mobilize those. It might be really canvassing the shareholder base and figuring out where people stand before you respond. It's really important not to be reactive, and then figure out if there are third parties or other assets you can deploy.
The last thing I would say is M&A campaigns are different, particularly if somebody's teaming up with a bidder. Because what happens is so many shares turn over in that first 24 hours, you can be left with index funds and ARBs and a bunch of your active shareholders sell out. And so, you don't know who your voters are and your supporters are gone, because they took their profits and they left. And so, one thing we counsel is in those first 24 hours, you got to make 20, 30 phone calls to your top shareholders, and you got to tell them, don't sell. We'll be back to you. There's a lot of upside here. And maybe figure out what your elevator speech on value is to make sure they don't sell into the ARBs, because that can be a real game-changer in the vote later on.
Barrett Golden: Circling back, it's a good point because, with the presidential election, there's going to be a shift in the regulatory landscape, and M&A is going to be a hot button and a huge lever that activists pull.
Elina Tetelbaum: Right. Because as Damien said at the outset, fundamentally hedge funds would like an event-driven outcome, and there's nothing more event-driven than a sale. And you know what's hard? Operational change. And that takes time. And so, if there's any flexibility or loosening of the ability to get M&A done, that is going to be plan A for a lot of companies that otherwise they would've had to actually seek to improve with ideas and suggestions.
Tom Germinario: I just want to comment on an approach. I guess not so much a public approach, but again, the call calls into IR, whether an activist has called into IR. And I think what we find the best advice is for companies to pause, take a breath, and get well researched and analyzed as to who's calling, what the firm is, what their history is. Have they waged fights before or filed letters against management? Some companies may take the view that, well, I'm not meeting with them. Sure, they're going to be meeting with them, but they should meet on their own timetable.
Meaning, as Lina said, you decide when to get back to them. You decide when to schedule the meeting. You schedule the meeting when you're ready. And that might be a week, it might be 10 days, but time to do the research, brief the board, and just know who you're talking to. Especially with these, there's a lot of first-time activist activity out there right now.
What are some of the main judgement calls a company has to make when they’re facing an activist situation?
Tom Germinario: So, let's discuss what are some of the main judgment calls a company has to make when they're facing an activist situation? Damien, what do you think?
Damian Fisher: Yeah, this is a great question. Something we think a lot about. I think I would put it in two buckets. One is, do you really know what your shareholders want, and are they telling you what they want? Because oftentimes shareholders don't tell management the true story, let alone the directors. So, do you know what your shareholders really want? And do you have a really good assessment of where they are? It informs so much of what you think you need to do, what you should do, what you might not be prepared to do, that you're being asked to do.
We don't want to put our CEO in front of every shareholder in a situation like this. And so, you've got to figure out the best way to get that feedback. It takes time. You have to be thoughtful. Hopefully you have some trust and relationship built to do that. And then obviously you have the big passive block. So really the shareholder sentiment I think informs the judgment. Probably the most important judge when you're figuring out how you're going to respond. The second thing I think a lot of companies struggle with is at the point where they have to decide whether to fight or not. And you usually get to an inflection point where you've engaged, you've heard them out, you've given them time, you've carefully assessed, and you just disagree. And there's often this debate on, well, shouldn't I just put one or two on the board and be done, and try and get some peace for a year while we figure this out?
What's one or two directors? I think that's a really difficult judgment to make, and it's very situational. Having shareholders on the board creates a whole dynamic, which is really important to understand, and most boards don't understand. And so companies I think have become a little bit shy of taking something public to the shareholders. It's not a proxy fight. You're not going to vote yet. But putting your best foot forward, making the reasonable change, you're prepared to do, taking it to the shareholders and getting some more feedback before you settle. I think we've kind of defaulted into this like, let's not fight. Let's settle before you've really put your best foot forward. And that's one of the important judgments to make. I think it's a difficult judgment to make.
Tom Germinario: It is.
Elina Tetelbaum: I mean, if you think about what goes into the ask from the activists. It's usually some combination of an idea about the business, whether the idea is that the company should be sold, or a part of the company should be sold. And of course, the proceeds go to the shareholders. Or some idea about rarely do they want you to buy something, but they might want you to spin something off. Some idea that you're underperforming and here is why, including potentially a CEO change. So, the business. And then some idea about the governance. And they like to link the performance to the governance by saying, well, why are these decisions not being good, sound economic decisions? It's because the board is not the right board. It's because they're missing X skillset. It's because they don't have sufficiently a shareholder perspective. The board then gets held accountable for these business ideas.
So, the judgment is often two-part actually on both fronts. What do you do about the business idea? What do you do about the board? And they are related, but they're not the same. So, you have companies that say, actually, we agree with you on the business idea. In fact, this board was going to do that very thing. We were in fact going to announce this in January, but now we'll announce this in November, and everyone's aligned. And isn't that a great resolution? Those situations are tricky because you would think the activists would be relieved and pleased that their great idea is being adopted, and they're going to make some profit off of investing before this has happened. But they would really still like to see the board change and now they no longer have the argument that the board wasn't making the right financial decisions. So that's a hard call of knowing that they might still press it.
Do you have the courage of your convictions to say, actually no, the board did do the right thing, and we will be able to convince our shareholders that this is the right board making the right decisions? Or do you say, we are so close on most things, we could just add one additional director and the activists will get some credit, and we don't have to spend four months fighting? So that's a difficult situation. The other difficult situation is when you actually don't agree on the business question. There's all sorts of, is this the right time to sell? Is this the right time to separate parts of your business?
Those are truly complicated judgments where certainly the investors and the activists don't have all the information that the board has in terms of leakage, in terms of the synergies that the businesses rely on internally. And so, when you really believe that doing something that the activist recommends is only in the short-term interest of the company, I think you kind of have no choice but to continue to make your case to shareholders and hope that they agree.
Barrett Golden: Everything you articulated is something that our clients think about for sure. A twist on that, right? Because activists don't have the same information that boards do. Sometimes we'll have clients think about entering into an NDA. Sometimes it's in advance of an investor day, where they want to give the activists a little bit more visibility into the board's thinking around why a decision is or is not in the best interest of shareholders. And that is a close call that boards and management spend a lot of time thinking about. It can really work for the company. I've seen it really work before. But it's a fine line because you have to really be sure that you know how far you're willing to go on the information that you're going to give.
And you have to be prepared for the activist to want to push you further in your public disclosures. Because the only way they can trade after the fact is to cleanse. So, some visibility there. One of the fun predicaments that we have from a communications perspective, but definitely not fun from our client's perspective, is when you get a lot of activists in the same situation. Then the judgment is where do you spend your time and who do you prioritize in, let's call it, settlement discussions? And every activist is different, and you have to enter that thought process and that decision making with that in mind. Sometimes the ask isn't always the same either.
What are some of the ways in which the advent of the universal proxy card has changed the way proxy fights are being waged.
Tom Germinario: What are some of the ways where universal proxies are affecting how campaigns get waged? Barrett, do you want to take that one?
Barrett Golden: Ultimately it becomes a head-to-head fight. The dissident has their three nominees and, whether they state it or not, they are going to be stocked up against three nominees on the company's slate. So again, going back earlier, it's really important to beef up the credentials of your board before you get into a fight. Do a better job of using your proxy statement not as a legal disclosure, but as an advocacy tool to explain why your directors are relevant. Not just what they have done in the past. And how and why links up to the strategy and value creation. So that's from a communications perspective, from a board advocacy perspective, I would say that's been the biggest change and the biggest opportunity for boards as a result of universal proxy.
Elina Tetelbaum: So, one interesting development is that, to use the universal proxy card, if you get to that stage of a proxy fight, the activist actually has to name specifically in the proxy card which directors they would like the shareholders to vote out. And what's interesting about that, and I think Cristiano has spoken about this as well from ISS, is the people that get named may not actually be who the shareholders ultimately think are the directors that should be voted out, if any should be voted out. And so that's created this also interesting mathematical puzzle where the activists may pick directors that maybe aren't the weakest directors. They just don't want them there because they might provide the strongest counterpoint to what their agenda is. And so, the shareholders say, no, not those people. And then the vote can get a little bit split. So, I think there's going to be an interesting... The proxy advisors did not always recommend against what the activist actually selected as the targets. And I think it'll be interesting to see if there's more alignment in the future to avoid some of those mathematically different results.
Tom Germinario: Absolutely.
Damien Fisher: And look, I'll be a banker for just a few seconds. The data is pretty clear. We have not seen more proxy fights because of the proxy card settlements are up, and they're happening faster based on what we're seeing. And 70% of proxy fights are against companies with three or more directors that have been on the board for over 10 years. And so it's very clear, to us at least, that the weaker individuals get targeted. Maybe not ultimately, but through the data it seems to be that way.
Tom Germinario: I agree totally. And if you look at the proxy advisory firm recommendations, they're clearly analyzing their performance stats, and determining their unaffected date, and what the problem really was. And then looking to which directors were responsible for the problem, who was around for certain decisions years ago and whatnot. So, it is definitely affecting or causing that real focus on individuals. And I think to Barrett's point and Lina's point, I think the companies in their normal engagement each year have to do a better job to embellish the directors, as you guys have said, in terms of their skillset and that they have the right directors on the board. So, it starts on a clear day as well.
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Are there any important trends in settlements?
Tom Germinario: Are there any important trends in settlements to mention?
Damien Fisher: I'll start. This is a topic that's near and dear to my heart. We find that obviously settlements have increased because directors and the universal proxy card, as we talked about, personally, I find that settlements are done rather quickly and companies could benefit from at least trying to put their best foot forward before a settlement is entered into. And we're seeing a lot of concessions in settlements to avoid fights that companies might not be aware of the consequences of. One, we'll talk about the dynamic of having a shareholder representative on the board. It doesn't necessarily have to be bad, but it introduces a dynamic. Secondly, activists are asking for committees, creation of new strategic committees or committees that can shift the balance of power in the boardroom.
Say they get one out of 10 directors on the board, but they have one out of three on a strategic committee. That creates power asymmetry and is disproportionate, and something that we advise very carefully on when that's being requested. And the third thing is a strategic review. Launching a strategic review as part of a settlement, it obviously puts the company in play. We're big fans of if a shareholder is coming on the board, why don't you take the time, get them fully up to speed, give them all the information, let them review all the things the directors have reviewed. And then if you then decide that a review is the right thing to do, you could do it. But we're seeing a lot of committees and a lot of reviews being announced.
Elina Tetelbaum: I think Damien, you're exactly right. There are things activists get out of settlement agreements that they could never actually win in a proxy fight, right? In a proxy fight, all they could win are board seats. In a settlement agreement they can get committees, they can get expense reimbursements, they could get commitments that certain directors will serve on other committees on the board. They get replacement rights on directors, right? If someone falls ill or dies or resigns, the activists can renominate that seat. Whereas if you just win an election and that happens, you don't have the right to replace that director. So, it's definitely important to not try and give away more than you really would have at stake in a fight. But I would also say, I don't really even love the word settlement because I think settlement has the idea that it almost has a litigation sound, like litigation settlement. Companies should resolve activist situations. They should resolve them.
And there are many ways to resolve them, including winning at the ballot. And not all resolutions are the same. And I do think that sometimes the longer you wait, you have to make a judgment, is time on my side? Is time not on my side? Sometimes doing something quickly before two bad quarters that you see coming, you may get the best resolution doing it that way. You may get a better resolution if you do in fact wait, and have good news, and then have your shareholders be happier with you, and then the leverage will shift. But I think part of what gets lost in the media narrative is that they all get reported the same way. Whether an independent director gets added to the board, or an activist insider, the media will say, so-and-so activist gets one seat on this board. And those are not the same things at all from a board dynamic perspective. So, I think companies do need to resolve these situations, but they need to resolve them in a way that allows the board to continue to function and execute on the strategy of the company that they support.
Tom Germinario: I'm going to comment quickly on understanding the shareholder profile, which we've talked a lot about. But I guess just to take it a quick step further is in a potential proxy contest, not only do companies need to understand their shareholder base as we've discussed, but in a contest we look at the history of the campaign itself. What type of campaign is it? How has the institutional investors acted in similar campaigns? Have they supported the board or the dissident? It's perfect if you find the right match for the campaign, and then do the research as to how they've acted in those situations. That type of analysis sets up our vote modeling under various scenarios, so that we can help the team with what are the chances of victory? What combinations of support of the top investors are the path to victory or defeat? And whether the company should consider settlement because the numbers look grim?
Elina Tetelbaum: Resolution.
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What are some of the lessons learned from high-profile situations from the proxy season?
Tom Germinario: Resolution. Any lessons learned from the high-profile situations so far this year?
Barrett Golden: Yeah. Third party validators are amazingly important in these fights. Not because they change the voting dynamic, but to your point on media, they change and influence the media landscape. There are dedicated beat reporters that cover activists. And so, the playing field is very uneven as it relates to the companies, which is why resolutions are reported, more often than not, as a win for an activist. Third parties, if they're in your favor, can greatly influence and reinforce the credibility of the team, the credibility of your plan, and the ability of you to win. That is one of the lessons from my perspective. I mean, Disney had everybody from Donald Duck to George Lucas as part of their third parties. I mean, that's Disney, of course. Right? But I mentioned earlier Southwest had very loud union voices.
Tom Germinario: And Trian had their share of supporters as well there. It's certainly an interesting battle.
I mean, succession, to the point we made earlier, is a big focus. A succession plan. We even find that in regular engagement without activism. Institutions more and more are asking about the company's succession plan before there's a proxy fight. If you have an important rock star CEO, the investors want to know when that CEO is thinking of calling it a day. So, succession planning is really, really important. ISS and Glass Lewis, just one quick comment there. We've probably covered it, but I still think that, in contests that target the CEO, there's a bit of reluctance to go against the CEO because of the fear of disruption at the company.
And it's very obvious that some of those recommendations are causing split votes amongst some of the institutions. As Lina said, certain are voting for some of the dissidents and some are voting for others. So anyway, stay tuned.
Well, thank you very much. That concludes our podcast. I want to thank Barrett and Lina and Damien for a great show, and we'll see you next time. Thank you very much.
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