Editor: Joe, tell us about your background.
Johnson: I have been at Goodwin Procter since 1986. My practice involves a substantial amount of M&A work, but at least half is representing both activist shareholders and companies in proxy contests and other situations where control of corporations or representation on their boards is involved. Since I have done a lot of this work from the activist side, I have a good feel for how activists look at things and what their tactics are likely to be.
Editor: On October 7, you were among the panelists at a conference sponsored by your firm: Facing The Market: The Latest In Shareholder Activism. Who were the other panelists?
Johnson: Joining me on the panel was my partner, Stuart Cable, one of our top corporate partners. The panel also included Mark Harnett, president and one of the co-founders of McKenzie Partners, one of the world's top proxy solicitation firms. It has been in almost every big proxy fight over the last 10 or 15 years. Also on the panel was Barrett Golden, a partner and principal in Joell Frank, one of the country's preeminent PR firms representing companies, not activists.
Editor: Who attended the conference?
Johnson: It was definitely a company-side audience. We had about a dozen corporate directors and CEOs and maybe two dozen corporate counsel, mostly general counsel and their deputies. The audience did not include institutions, funds or other shareholders.
Editor: Shareholder activism has been a hot issue this year. What were some of the issues discussed at the conference?
Johnson: The first segment of the conference was devoted to a discussion of recent developments and trends that are being seen in shareholder activism. This was followed by a hypothetical case examination in which Mark Harnett and I played the role of preparing to talk with an activist client, giving us the opportunity to discuss a number of topics of interest to activist shareholders. This situation gave the company-side attendees insights into the kinds of considerations that are important to an activist. Afterwards, Barrett Golden and Stuart Cable went through a similar role-playing exercise from the company side.
Editor: What are some of the recent trends in shareholder activism?
Johnson: Looking back over the past year, many people said that the 2009 proxy season was going to be a lot quieter than 2008. That turned out to be wrong. If you look at Shark-Repellent.net, which is probably the best collection of proxy contest data, the number of proxy fights in 2009 increased to 132 year-to-date as opposed to 125 in 2008. The tone of the contests was a little bit different, but shareholder activism isn't going away, isn't likely to go away and is probably going to continue to increase in the years ahead.
In contested situations, dissident shareholders were successful this year in obtaining at least one board seat in over 70 percent of those contests. RiskMetrics, which tends to side with the dissidents, influences the votes of institutions with significant shareholder percentage holdings - meaning that management is going to lose a seat in many instances where there is a contest. People can like it, people cannot like it, we can think it's unfair, but that has been the situation for awhile, and the percentages have been trending up.
Editor: Among the groups of activists which do you think are likely to be most active?
Johnson: Unions haven't done full-fledged proxy contests because of the cost. Labor unions and special interest groups, at least initially, will be those that are going to use the shareholder access rules and not what we call traditional activists.
To run a full proxy contest for a public company costs generally a half-million to a million dollars. That's going to stop most people right in their tracks. Only those with very significant holdings are going to be willing to spend the time and the money required for a full proxy contest. The serious activists, the people I know, won't use the shareholder access rules because of some of the requirements in the proposed rules.
Editor: Won't the proposed proxy rules bring in directors who may not be team players?
Johnson: I think a lot of activists and outside shareholders and funds would object to the suggestion that someone selected by the shareholders wouldn't be a member of the "team." Outside directors selected by the shareholders through the proxy access rules should be even more interested in representing shareholders' interests.
In the proxy contests in which I have been involved the people proposed by most activists are outside independent people with qualifications in the industry. When I represent activists in proxy contests, I always tell them that those are the kinds of people we should propose because it substantially increases the chances of success. I've found that if you watch a board meeting a year after bringing in someone who doesn't have an agenda and is just a smart person with industry expertise, you can't pick out the activist candidate. It's not a question of getting "your" director or "my" director; you're getting an independent person who is going to change things and look out for the interests of all shareholders.
Editor: What are your views on the proposed proxy access rules?
Johnson: I think people are still trying to get their minds around them. It's really hard. The proposed rules are lengthy and very complicated. Given the fact that there are well over 500 responses, it's difficult for anyone to say with any degree of specificity exactly what the final rules will look like because the SEC is still reviewing them. They could differ materially from what had been proposed.
To me, the SEC's proxy access proposal is just an evolution of a trend that we have been seeing over the last 10 or 20 years. When I first started practicing law in the late 1980s, shareholders voted with their feet. If shareholders were unhappy with an investment, they just sold the position and moved on.
The potential effect of RiskMetrics and the other proxy advisors was something that people did not fully grasp even 10 years ago. With the passage of time, RiskMetrics and Glass Lewis have become much more likely to take a very close look at a situation. Most people now feel that when in a short-slate situation, they are, when in doubt, open to supporting dissidents. And, a recommendation by a Glass Lewis or RiskMetrics is a lot more important today than it was a decade ago. Other investors who do their own research are more amenable to looking at facts and circumstances and supporting a dissident.
The world is changing. Seventy percent of S&P 500 companies now have majority voting for directors. Twelve months from now it's going to be well over 70 percent, and shareholders in smaller and smaller companies will be insisting on it.
Three or four years ago "just-say-no" campaigns didn't really have any effect at all, but now they have a lot of teeth. In the spring, it's likely you will see "just-say-no" campaigns targeting directors in high-profile companies who chaired compensation or audit committees. Public companies are increasingly going to be asked, if a majority of your shareholders don't support a director, are you going to kick him or her out? That's a very difficult situation for a public company. If management thinks the director has a unique set of skills, they will want to leave the director on the board. However, if they keep him or her on, the company had better perform well because otherwise it may face a proxy contest the following spring. Shareholders are not likely to view favorably the fact that management ignored their wishes.
Editor: What steps should companies take now to avoid having new directors imposed on them if shareholder access rules are adopted?
Johnson: In this environment, some form of shareholder access rules is almost inevitable, and companies will have to adjust to that reality - and the sooner they do that the better.
We began and ended our conference with a recommendation that "Thou shalt know thy shareholders." When asked who their top 10 shareholders are, management should know who they are, should have met with them in the last quarter, should know how they feel about the company and should know what their hot buttons are. If management fails to follow this precept, their company becomes a target.
We tell our clients to take knowing their shareholders very seriously - to take corporate governance very seriously.
We advise clients to look at the people who are on their board. Do they have the skills that are needed? Has there been turnover on the board? Did new directors bring the diversity of skills that shareholders are looking for?
In these ways, management can protect the company from having directors imposed in a proxy contest or under a future proxy access rule. It's going to become easier and easier for people to run a proxy contest, so what you need to do is to take steps to avoid being a likely target.
This strategy really works. Last spring, Target employed this strategy to win. To be a company like Target, you want to know your shareholders so that, even if someone runs a campaign against you, you can win.
People treat proxy contests as a very complicated thing. Just think of them as election campaigns. What you want to do is increase your chances of winning so much that most times people will pick another target, or, if they don't pick another target, you have worked so hard to bring your shareholders over to your side that you gain a resounding victory - and people are less likely to pick on you next time.
Published November 2, 2009.
