Shareholder Activist Update: Best practices for working with proxy advisors

March 31st, 2011
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Contributed by: Michael R. Levin, The Activist Investor
Proxy advisors consult to investors about how to vote on the range of matters that require shareholder approval at the public corporations in an investor portfolio. They have become a critical stop on the road show when management and activists contest these matters, such as over electing directors.

An activist investor that seeks to elect directors to a company board, or to approve a resolution at the annual meeting, inevitably will need to persuade one or more proxy advisor to recommend the activist’s position over management’s. Below is a checklist of items to consider in engaging with a proxy advisor.

Three firms have emerged as the principal proxy advisors: RiskMetrics (successor to ISS), Glass Lewis, and PROXYGovernance. There’s not much difference among the firms, although RiskMetrics is the oldest and largest, and thus tends to carry a bit more weight with its decisions. An activist investor usually needs to solicit the endorsement from all three firms for a slate of corporate director candidates, supporting various shareholder proposals, and for other matters for which the activist needs the votes of other shareholders.

These endorsements can matter a great deal. Except in the most controversial situations, most large institutional investors, including pension funds, endowments, and mutual funds, usually follow proxy advisor recommendations when voting their shares. These investors have way too many companies to follow to do anything but, and besides, that’s why they pay the considerable fees to these firms.

It’s worth noting that proxy advisors evaluate a given activist investor’s proposal (for example, which director candidates to endorse) with respect to a set of their own policies or guidelines. So (continuing with the example), if RiskMetrics requires incumbent directors to attend 75% of the board and committee meetings in the past year, and an incumbent failed to do that, RiskMetrics will usually recommend that investors not support that incumbent, and support an activist investor’s candidate. The proxy advisors spend a considerable amount of effort reviewing, refining, and updating these policies, since they allow firms simply to compare a given proposal to the existing policy, rather than evaluate each proposal individually. These policies also allows each proxy advisor to render consistent advice across proposals and companies.

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Related Article Tags: Shareholder Activists, Corporate Raiders and Proxy Battles; Investment Management and Hedge Fund Firm Mergers, Acquisitions, Spin-offs and Transactions; Hedge Fund Resources and Featured Partner News

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