February 27, 2014

The New SDX Protocol: Fixing the Adversarial Relationship Between Management & Shareholders?

One of the strangest things in corporate governance is that more than a few companies take the cardinal rule of “Our customers are always right” – and add the premise of “But our owners are always wrong.” I’m worldly enough to recognize that not all shareholders are the same – and thus, some truly are adversarial to management – but that still doesn’t explain why some companies go to great lengths to treat most shareholders with little respect (for example, holding annual meetings in far-flung locations).

To highlight this oddity, we have entered into an era of “shareholder engagement.” A good thing – but it boggles my mind that companies hadn’t been engaging with their shareholders all along. Anyways, the latest wisdom in this area is the new “SDX Protocol,” which is a set of 10 common sense principles that companies & shareholders can use to help them engage (you have to register to access it, but it’s free).

In this podcast, Anthony Goodman of Tapestry Networks (who led the SDX Protocol meetings) explains the new SDX Protocol, including:

– Can you explain who you and Tapestry are?
– What were the origins of the project?
– How often did the working group get together?
– Any principles left on the cutting room floor?
– What exactly is management’s role in engagement?
– Any surprises by the reaction to the announcement of the protocol?
– Any additional activity going forward?

By the way, in his blog last night, Mark Borges highlighted a nice piece of disclosure by a company about its shareholder engagement efforts – includes disclosure of the % of shareholders that were engaged…

Icahn Weighs In: The SDX Protocol

Meahwhile, Carl Icahn weighed in on the new protocol by saying it has “tremendous potential” – and noting that he doesn’t buy positions of a company for a quick pop. Carl provides a table with a list of his investments and the tenure of his holdings. Here is an excerpt from his piece:

It is, of course, incumbent upon institutional shareholders to be responsible stewards of the funds they manage, and the Shareholder-Director Exchange has the potential to create an open path for these shareholders to engage in meaningful dialogue with the directors who oversee their investments. However, as highlighted by Kenneth Squire, publisher of The Activist Report, there are some troubling aspects of the 10-point protocol for engagement that was released by the Shareholder-Director Exchange. For example, I see no reason why a director should consider a shareholder’s voting history when deciding whether or not to hear that shareholder’s concerns. No shareholder should ever be penalized for exercising their inherent right to vote how they see fit.

Nevertheless, the formation of the Shareholder-Director Exchange is in and of itself a positive development if for no other reason than to stand in stark contrast to the hawkish approach that has for years been championed by firms, such as Wachtell, Lipton, Rosen & Katz LLP (“Wachtell Lipton”) and Goldman, Sachs & Co., who have made fortunes from corporate conflicts by spreading the implementation of entrenchment devices, like the poison pill and staggered board. Just recently Wachtell Lipton promoted a new entrenchment scheme whereby incumbent directors unilaterally amend a company’s bylaws to disqualify certain individuals from challenging their positions on the board – a move that was widely criticized and quickly discredited.

Pay Ratio Miscellany: Shareholder Proposals & Disclosures

With over 120k comments received by the SEC, the pay ratio proposal officially has garnered the 2nd highest number of comments in the SEC’s history. Just throwing that out there. For an example of a company that has used internal pay equity for years in setting its senior manager’s pay, check out this blog by Mark Borges, which summarizes the latest disclosures from Whole Foods.

Also, in the shareholder proposals area, some predicted there might be pay cap proposals that use pay ratios as the formula – particularly in light of what happened in Switzerland. This request for no-action relief by 3M bears that out…

– Broc Romanek