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A New Proxy Regulation and Depressed Stock Prices have Companies Contemplating Risk for Next Year’s Proxy

Wednesday, October 12, 2022

A new regulation came into effect this September that might boost an activist investor’s ability to elect its director candidates to boards of target companies.

The new rule allows shareholders to vote on a ballot showing a full list of board candidates from both companies and activists. Previously, two proxy cards were issued to shareholders; one card showing director candidates presented by the company and a second card showing director candidates presented by the activist. With all candidates now listed on a single card, activists may find it easier to get candidates elected.

Many companies fear that this rule will be a win for activists, coming at a moment when stock prices and shareholder value are suppressed. Typically, shareholder activists focus on shareholder value as a gauge for management performance. When shareholder returns are diminished, activists strike, blaming the poor stock performance on bad management. The recent market-wide equity sell-off has more to do with overall economic conditions than company specific issues. That said, activists are not likely to acknowledge the effects of stubborn inflation and the Federal Reserve’s response to it as the reason for lower stock prices. Instead, they will only focus on stock performance while stoking negative investor sentiment against management.

There is little anticipation that sell pressure on equities will reverse while the Federal Reserve remains hawkish on inflation. During 2022, concerns over recession, inflation, and the Federal Reserve’s response of aggressively increasing interest rates to combat both, encouraged investors to ditch equities and seek safe havens such as cash and cash-like assets. With the increase of interest rates, investors have more choices for investment in the markets which is also fueling the rotation away from equities. Equities are yielding to short-term treasuries, which are giving investors the opportunity to preserve capital while earning modest returns.

Meanwhile, corporation’s valuations have suffered and look like they will continue to suffer for the near-term. Although many corporations consistently reported healthy balance sheets on their quarterly earnings statements, their valuations shrunk due to risk averse investing, prompting investors to shift from the equity markets.

Cash rich companies with lower stock prices are particularly anxious that they may be the target of shareholder activism. As companies begin preparing for their next year’s proxy, considerations for dissident shareholder activity are being made. As the saying goes, the best defense is a good offense, meaning shareholder monitoring and engagement is critical in this moment. However, the opaque shareholder disclosure environment of the U.S. markets adds a layer of difficulty for companies to engage in this proactive strategy.

In the U.S., companies have long struggled with access to comprehensive, timely shareholder data. Many times, a company is not even aware of an activist presence among its shareholder base until it’s too late. Although companies do have access to institutional ownership of investors owning $100MM+ in equity assets on a quarterly basis, little else is known about them, particularly regarding proxy voting policies. Most companies engage with these shareholders from an investment management perspective, however, the proxy voting perspective can be another animal entirely.

Steps companies are taking to help protect themselves from activism include:

  • Identifying and monitoring shareholders comprehensively – Companies should go beyond the public filings. Shareholder identification services will provide near-real-time shareholder information ahead-of and beyond the record date for the proxy. The identifications should be inclusive of all types of shareholders. Many companies focus on top institutional investors, but in the case of defending against activism a complete identification is required. In addition to institutional investors, the identification and monitoring should include non-filing institutional investors, significant retail investors, traders, registered shareholders, and insiders.
  • Thorough Shareholder Analysis – Top-down analysis of your investor base and their activity can give you insights into how the street views your company as an investment. Organize and analyze investors by type, style, turnover, cost-basis, proxy voting agency influence, etc. Shifts in ownership on these levels can give you better insight into management support.
  • Dig deep – Don’t just stop at the macro-trends, look deeper into your investors. Determine if registered investors are moving shares into street name or if street investors are moving shares into registered name. These transactions are indicative of potential investor selling or activism, respectively. Identify how an investor votes their proxies. For example, do they vote shares through a parent company who makes the proxy voting decision? This information can help you determine how to best influence those decisions.
  • Communication – Activist investors will speak to your shareholders ahead of engaging with a company. Thus, you need to engage with your shareholders too. Reassure investors that management has the correct strategy to grow shareholder value and that management is executing on this strategy. A lack of shareholder engagement will open the door for activists to own the narrative of the company’s story. In this scenario, an activist can very quickly “poison the well,” turning shareholders against management.

About the Author

Louis Cordone is the Senior Vice President of Data Strategy at EQ + AST, an industry leader in ownership intelligence services.

Nowadays, it’s more important than ever to have detailed information about your shareholders – who they are, and what motivates them to invest (or divest). The EQ + AST ownership intelligence team provides clients with the accurate data they need to measure how shareholders will react to market volatility, corporate actions, and more. We investigate and provide detailed and timely information in a way no other intelligence provider can – across all stakeholders of a company, on and off our books.

For more information, visit https://www.astfinancial.com/ownership-intelligence.