The Activist Investor Blog
The Activist Investor Blog
If You’re Waiting for ISS, It Might Be Too Late
Recently I asked a friend how a current proxy contest was going. I hadn’t followed it closely.
He replied, “Expecting ISS to weigh in any day now. I think the dissident slate has the votes, but you never know.”
This troubles us a little. The dynamics in proxy contests suggests that if an investor needs a favorable opinion from ISS or Glass Lewis (GL) on a proxy vote, maybe it’s already too late to win.
Why Need ISS and GL?
Investors and companies alike covet the endorsement of ISS and GL. ISS and GL deliver an independent opinion about a investors’ thesis for a company, and its director nominees. Support from ISS and GL validates investor demands to restructure, return cash, or slash exec comp. Not that a confident, aggressive PM needs validation, but it can’t hurt.
ISS and GL also have a degree of influence over the actual vote. 10-40% of outstanding shares of a company vote the way these firms advise. Even better, ISS and GL literally control the votes of a decent number of those shares, through their share voting services. Some clients delegate the actual vote decision and the mechanics of voting to ISS and GL. If one or both supports your thesis and candidates, you automatically win those votes.
In a close proxy contest, those percentage points can make the difference between winning and losing.
Why Wait for ISS and GL?
Our friend’s remark makes us wonder why the activist investor needed to hear from ISS. That activist investor “think[s]” they have the votes, but is not sure.
We can think of two reasons, neither encouraging, why an activist investor would not know with some certainty about the outcome of a vote:
❖The portfolio company has a high percentage of individual investors in the shareholder base. An activist investor has no reliable way to survey those shareholders, which of course is why we have shareholder votes. Yet, we doubt that enough individual investors follow ISS and GL, or even know about ISS and GL, for the ISS and GL opinion to matter to them. You should consider with care a proxy contest that depends on the votes of hundreds or thousands of disconnected individual investors. The company has a decided advantage in communicating with its own shareholders.
❖Institutional investors have not concluded what they think of the thesis and the BoD nominees. Despite an investor’s best efforts, they have not persuaded these investors of the validity of the case for change, or of the credentials of its nominees relative to incumbents.
Problems With Waiting for ISS and GL
While support from ISS and GL certainly can’t hurt, it also is by no means assured, even in poor performers. In proxy contests, both firms render opinions based on two criteria:
❖Is the company bad enough that the BoD needs change, and changing the BoD will matter?
❖Will the shareholder nominees do better than incumbents?
If an investor can’t persuade institutions on these two points before ISS and GL render an opinion, an investor may not persuade ISS and GL, either.
Even worse, ISS and GL have less influence than one might think. Most of the largest institutions have independent proxy departments that analyze proxy contests. ISS and GL have input to their decision, but hardly determine how they vote.
Why Is It Even Close?
We prefer activist projects at portfolio companies with big problems, obvious solutions, and a concentrated institutional investor base. Who wouldn’t? There, it becomes straightforward to convince other shareholders of the case for change, and that your BoD nominees make more sense.
Obviously, not every company fits. Many situations can get close. The less it fits, the more a shareholder depends on ISS and GL to help make the case. As you depend more on ISS and GL, you lower the chances of prevailing.
Worry about ISS and GL, especially if you can’t avoid a close situation. But, try not to count on them.
Tuesday, May 5, 2015