Some ways to prepare for a proxy fight.
‘I see a strong future for WidgeCo (WIDG) but there are many changes that must be made,’ Ari Sing Starr, president of WIDG tells corporate director Turner Rench in a private meeting. Rench faces reelection as a WIDG corporate director in 2013, and while he listens attentively to Starr’s vision he secretly hopes the company will offer him a full-time position.
An activist investor group has made a bid to add its own slate of directors to the WIDG board and change the company’s direction, and Rench’s future with the company could be less certain if the group wins. ‘The latest acquisition of Willy Wonka Co will take us in a new direction and help with our growth strategy, but we need your support,’ Starr explains.
Starr, the recently hired arrogant protégé of WIDG chairman and CEO Dr Buck Dimes, was part of a mock proxy contest presented last Wednesday by the Society of Corporate Secretaries and Governance Professionals (SCSGP) and the National Investor Relations Institute (NIRI) at Capital One Financial’s headquarters in Virginia.
This contest is the second of its kind held by the two groups, and corporate directors, institutional investors, hedge fund managers, investor relations officials and consultants all gathered to take part. The purpose of this battle is to prepare corporate executives and directors for the possibility their company will encounter a dissident investor.
In this setting, SCSGP and NIRI members assumed the roles of directors, investors and executives of the underperforming company WIDG, makers of specialized widgets for defense, shipping, electronics and food services industries. The company is dealing with a not-yet fully integrated acquisition, as well as governance and key fiduciary issues, which led to shareholder activists making a move.
Ann Marie Plubell (pictured left), the former vice president, associate general counsel and corporate secretary of Sallie Mae who now runs her own advisory firm, believes that when it comes to a proxy battle, corporate secretaries and directors need to be prepared. ‘Some may argue that advance preparation is a waste because events in a battle move too fast and are too unpredictable,’ she says. ‘Experience proves that view is wrong.’
Proxy fights are extremely costly, pose a major setback to any company and can happen anytime. Most recently, billionaire Carl Icahn made a serious move in his proxy fight with Clorox by threatening to replace the company’s board with his own candidates after the consumer products giant rejected his $10.7 billion takeover bid. Icahn remains the company’s largest shareholder and is actively pushing Clorox into a sale, according to reports.
This is not the scenario most corporate directors want to be faced with. Nevertheless, if it does happen, what should you do? ‘The corporate secretary is a critical first responder,’ Plubell reasons. ‘These corporate officials are inside the boardroom routinely and they understand the dynamic and position of the company, but they can tell the leaders from the followers. They will deal with the facts, not opinions or personalities.’
Joe Wilkinson (pictured right), the vice president of investor relations at Deltek who played the fictitious character Buck Dimes of WIDG in the mock proxy fight, points out that proxy battles generally feature economic and governance issues. A good strategy would be for the corporate secretary to tag-team with the investor relations officer to get the job done right.
‘When it comes to any type of battle, you need a significant amount of support and the corporate secretary has the regulatory and compliance background while the investor relations officer understands the shareholder message,’ he explains.
In light of this, Plubell provides a checklist corporate secretaries should have handy if a proxy fight occurs:
(i) Try to understand the boardroom, make sure the board process is fair, follow it and document that fiduciary duties are met
(ii) Communicate with all board members, be respectful and helpful
(iii) Identify key governance strengths and weaknesses
(iv) Build your team to respond at an hour’s notice – not within a week or a month
(v) Routinely test technology on which board members rely
(vi) Always have an emergency exit plan.
Many of Plubell’s points were explored at this year’s mock proxy battle. Participants attending the event acted as board members trying to decide whether the company should negotiate a deal with dissident investors or find other solutions. The arguing and sharing of opinions was valuable.
‘If there’s one thing I learned from this battle, it’s that there are many things you can do to avoid one,’ says Wilkinson. ‘Look for blind spots, exposure points and weaknesses, and try to correct them before it ever comes to a battle.’
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