Is Shareholder Activism Here To Stay?

Editor: Jeff, please describe your practice.

Kochian: I am primarily an M&A lawyer, doing a fair mix of public and private, U.S. and cross-border deals. I have also represented a fair number of public reporting companies, and that combination of experience lends itself to doing activist work. This variety of experience also allows me to advise on unique situations, which makes my practice very interesting. I do a fair number of “bespoke” transactions, specifically tailored to a certain situation, making for very stimulating work. Of course, that also makes it quite stressful since there is no set playbook.

Editor: Do you see a shift in claims put forth by activist shareholders from “say on pay” to other subjects – the environment, cybersecurity, and big data?

Kochian: Activists fall into two buckets. I put “say on pay” into the first bucket with 14a-8 proposals and other social issues that are raised by pension funds or the so-called corporate gadflies. These groups are not trying to manage the target company or trying to change the way its business is run. Many of them submit shareholder proposals under Rule 14a-8 every year. They might vote against management from time to time, but they’re not trying to change the composition of management. They’ve invested with that company and with that management team.

The other group of activists includes the Icahns and the Peltzes, who are trying to fundamentally change a company. They’re generally not satisfied with either management’s or the board’s performance. Oftentimes, they think that there are better uses of capital that can generate much higher returns or that capital should be returned to shareholders. When people talk about activists these days, I think they’re really focused on the latter group, for whom “say on pay” might be a mere footnote.

Editor: How successful have activist groups been in the past in terms of extracting settlements and in delaying shareholder meetings? Do you think they’ve now been stymied by corporate resistance to their overtures?

Kochian: No, I think the opposite is true. Reverting back to the two buckets, I think the 14a-8 types see some settlements and some issues put to a vote. These can certainly generate some press, for example, splitting the roles of the chairman and CEO. However the “fundamental” activists are seeing more and more success recently. I’m seeing a lot of activists be quite successful in gaining one or two board seats as part of a settlement, which usually includes a standstill agreement in which they agree not to conduct a proxy contest while they are sitting on the board. These settlements allow them to effect change from within the boardroom rather than outside. In fact, getting those settlements has become an important part of the activist process.

Editor: What companies stand out in your mind as targets for activists’ campaigns?

Kochian: There are two basic elements that describe a likely target. When you have both of them in one way or another, it is really the ideal situation for an activist. Number one is obviously bad governance, where you can assail the board of directors whether because they are cronies of the CEO, they’ve been on the board too long or are just not sophisticated, or, as is sometimes the case, the business is externally managed, so that the incentives between management and the shareholders are not properly aligned.

Number two is the inefficient use of capital in a company. I think the “fundamental” activists are really focused on the appropriate use of capital. If you have cash that isn’t being deployed, and there are no good prospects to invest that money, it’s not an efficient use of capital. The obvious question becomes: why aren’t you returning it to shareholders?

Editor: What particularly interesting battlefields at annual meetings are anticipated this year?

Kochian: The nomination windows for most companies this proxy season are generally closed or closing, so I think we know where the major fights are. While I don’t see any specific trends, I think we have seen a lot more activity in the past year, and I expect that trend to continue. In addition to the usual suspects, institutional investors and funds that traditionally have not been activists have stepped up to the plate. From the other side of it, ISS and the media have shown much more interest in the activists’ arguments. All in all, this makes for an evolving landscape, which should lead to increased activity in some surprising places.

Editor: Do you think shareholder activism is here to stay?

Kochian: I think it’s definitely here to stay. I think it’s going to look very different in five years, since corporations are looking at governance more carefully and will be better prepared from a financial perspective so that they’re ready when a shareholder activist targets them. I think being ready is going to really change the dynamic. I also think you’re going to see more long-term investors, such as hedge funds and even some mutual funds, start to rattle their sabers because clearly there is value to be extracted by keeping management on their toes, as the activists have demonstrated. Those more “classic” money managers are seeing what the activists are actually able to accomplish, and it is creating some interest among those non-activists.

Editor: Are such strategies as setting up an enterprise risk management program a good counterweight to activists’ attacks? What other strategies work?

Kochian: Yes. I think, when it comes right down to it, the boards of directors, the CEOs and the CFOs are going to be looking at the internal ROE of their major assets with an eye to what their risk-adjusted returns should be. Those assets that are not contributing to their target return need to be reassessed on a regular basis. While it is currently not widely done, it may become a more standard method of operation. This is a net positive for shareholders, and I think it’s something that’s going to be done consistently going forward.

Editor: What new requirements do you see on the horizon on the part of institutional investors in terms of their demands on portfolio companies, such as access to management and high-dividend cash payouts?