Large asset managers, hedge funds and other shareholders gathered at an Institute for Corporate Governance & Finance event at the Law School to discuss different models of shareholder engagement. The panel focused on the nexus between governance and operations; it also examined investors’ stewardship of companies. Edward Rock, professor of law and director of the Institute for Corporate Governance & Finance, and Wendell Lewis Willkie II, adjunct professor of law, moderated the discussion.
The event took place just days after panelist Nelson Peltz, chief executive of Trian Fund Management, won a months-long public fight for a seat on the board of Procter & Gamble (P&G). An activist hedge fund, Trian targets large companies often considered untouchable due to their size, such as P&G and Bank of New York, both of which had lost significant market share over a number of years, said Peltz. “What we want to do in these big companies is create accountability and responsibility from sales to EBITDA [net income],” he said. “Our goal is to get the company and the board to do their job and face reality.”
In the case of P&G, Trian used a proxy vote to take on the consumer product giant, which had initially rejected Peltz’s request for a board seat. The fund reportedly spent at least $25 million on the fight, while P&G devoted $100 million. Peltz finally won his seat by a margin of about 43,000 votes, or 0.0016%.
Joseph Landy, co-CEO of Warburg Pincus, presented the private equity view of shareholder engagement. Warburg Pincus manages more than $44 billion in private equity assets. Landy said the firm always takes seats on the board of directors of portfolio companies and holds majority positions in a third of its investments. The CEO stressed that Warburg Pincus was an active, but not activist investor, and noted that often boards spend much of their time on non-strategic issues.
“You find yourself dealing with active shareholders, regulatory issues, and a lot of other issues that are not contributing to the bottom-line growth and profitability of the business,” said Landy. “I find this very frustrating and unfortunate in terms of where governance has gone in this country.”
In the common scenario in which company management and active shareholders disagree over the strategic direction of the company, noted Rock, the large asset managers such as BlackRock, State Street, and Vanguard ultimately cast the deciding vote.
Matthew Mallow, chief legal officer of BlackRock—the world’s largest asset manager with $5.977 trillion under management—noted that BlackRock never takes a board seat and is not an active investor, although it does vote at thousands of shareholder meetings. Even so, BlackRock must field questions from regulators, shareholders, and the press. In response to this dynamic, the company began to explain its shareholder decisions on its website.
The increasing number of proxy fights such as the one between P&G and Trian shows that “there is no real understanding between companies and their investors,” said Martin Lipton ’55, who presented the view of publicly traded companies.
Lipton laid out some of the questions around shareholder engagement that still need to be answered. “Should investors be exercising their power of stewardship without being prompted by an investor who is unhappy?” he asked. “Should companies go look to investors to tell them what the company should be doing?”
Posted December 8, 2017