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13D Monitor Real-time Activist Newsfeed


Nestle SA has come under pressure from Dan Loeb's Third Point, which has built a stake of more than $3.5 billion in the world's largest food company.  The hedge fund is expected to urge management to "pursue change with a greater sense of urgency" by selling its stake in L'Oreal SA, increasing leverage for share buybacks, and launching a review of its portfolio.  More specifically, Third Point wants Nestle to scour its portfolio of more than 2,000 brands for possible sales and consider "accretive, bolt-on acquisitions in high growth and advantaged categories."  Best known for engaging U.S. and Japanese companies, Third Point has lately been drawn to European investment opportunities due to strong and improving economic data.  This is Third Point's single largest ever investment, and it is also the biggest company Loeb has ever engaged. The fund owns a 1.3% stake in Nestle.

Pandora (P) co-founder and CEO Tim Westergren plans to step down as the company's leader, according to sources. As of press time, the streaming-music service had yet to name a successor. Most, though, expect Westergren to remain at the helm of the company he founded 17 years ago until a new chief executive is in place. Westergren has been running Pandora since 2016. Before that, the CEO position had been occupied by a series of professional managers. Previously in June Sirius XM (SIRI) said it would invest $480 million in Pandora in exchange for a 19% stake and three board seats. That deal has yet to close, however.

Norway's wealth fund—the largest sovereign wealth fund in the world—wants to exclude companies with non-voting shares from major indexes in a bid to improve corporate oversight.  It supports a plan to place a "zero investability weight" on companies with no listed shares with voting rights.  "Society benefits when companies are well run and asset owners take their ownership responsibility seriously," said the $960 billion fund's CEO, Yngve Slyngstad.  "Voting is an important tool to secure good corporate governance and ensures that asset owners are able to make the board accountable and ensure long-term value creation."  The fund's effort was sparked by the voteless initial public offering of Snap Inc. (SNAP), which in March became the first firm to go public without giving owners a say in its business.  Because Norway's wealth fund mainly follows indexes when it invests, the ability to influence companies by voting is critical to its strategy.  Norway's wealth fund said it will back the introduction of a minimum threshold based on the ratio of the company's voting rights, as suggested by FTSE Russell.  Failing to meet that floor would mean a lowered weighting, it said in a letter.  The Norwegian wealth fund has increasingly focused on corporate governance issues and voting, including blasting excessive CEO pay and refusing to invest in companies that do not meet its environmental and ethical standards.

Group Five Ltd.'s largest shareholder, Allan Gray Ltd., has nominated former CEO Mike Upton to the board as a non-executive director and has proposed that the South African construction and engineering company be broken up. In a letter to shareholders, Group Five said Upton's return would be "inappropriate" given that he led the company "at a time when historical industry behavior was severely criticized." The Johannesburg-based company said the board also disagrees with Allan Gray's breakup plan and has the support of other investors. The Cape Town-based investor has proposed a total of five new non-executive directors—to replace the five slated to resign—in an attempt to force the company to alter its strategy. Shareholders will vote on the appointments at a July 24 meeting. Group Five has proposed a further four non-executive directors for shareholders to vote on as an alternative to Allan Gray's proposals, two of whom were nominated by the Public Investment Corp., Africa's biggest money manager, and two by Johannesburg-based Mazi Capital.

Shareholders led by Effissimo Capital Management were unsuccessful in removing the chairman and the president of Kawasaki Kisen Kaisha (K Line), Japan's third-largest shipping line, at the annual meeting on Friday.  The investors had argued the company was making insufficient profits.  K Line responded to the pressure by sending a letter to shareholders earlier this month backing Jiro Asakura as chairman and Eizo Murakami as president and CEO.  K Line's share price declined 4.5% in trading in Tokyo on Friday.

Shareholders are expected to pressure the board of embattled software major Infosys (INFY) over corporate governance and performance issues at Saturday's annual meeting.  "You can expect fireworks at the meeting from retail and some institutional investors as the company's image or brand equity took a beating after co-founder NR Narayana Murthy voiced concerns over governance and other issues, which are affecting its operations and business prospects," a retail investor said Friday.  The meeting follows a months-long fight between promoters and the board and comes amid a lower revenue outlook for this fiscal year, tech disruptions, and slowdown in the IT industry.  Head Hunters India managing director K. Lakshmikanth said promoters may not confront the board at the meeting to avoid embarrassment, but activist shareholders would definitely seek explanations on issues like governance and higher pay for top executives.  Some investors are likely to seek an overhaul of the board, especially the removal of R. Seshasayee as its executive chairman for being unable to control CEO Vishal Sikka.  "With a combined 12% share-holding, the promoters are entitled to have one of them on the board as a director.  It appears neither the board offered nor the co-founders asked for it to safeguard their interests.  Other shareholders and institution investors may ask the board to appoint any of them for the sake of the company's welfare," Lakshmikanth added.

Anne Sheehan, the California State Teachers' Retirement System's (CalSTRS) director of corporate governance, has been elected chair of the Securities and Exchange Commission's Investor Advisory Committee (IAC). Sheehan was appointed a member of the IAC upon its 2012 creation. Three years later, she was elected vice chair and has been acting chairman since April. All IAC elected officers are required to serve three-year terms. The IAC's main task is to advise the SEC on regulatory priorities, the regulation of securities products, trading strategies, and initiatives to protect investor interests. Sheehan currently oversees an 11-member staff, who manage a $4.1 billion corporate governance portfolio. CalSTRS Corporate Governance votes more than 7,800 proxies a year.

In a non-binding vote, Mylan NV shareholders have voted against the company's executive pay policy. They also re-elected the board at its annual meeting, in spite of a shareholder campaign in the wake of a scandal over high prices for its EpiPen emergency allergy treatment. Company officials did not disclose the vote totals for the board members. Investors critical of Mylan's board had a steep threshold to cross as more than 66% of the shares voted, along with over 50% of Mylan's outstanding shares, were needed for the various directors to lose.  New York City Comptroller Scott Stringer, one of the most vocal opponents of Mylan's board, said the failure to disclose the vote totals likely means the directors face strong opposition.

Ancora Advisors LLC is pressuring Potbelly Corp. (PBPB) to change its strategy or explore the sale of the company. Ancora owns 4% of the sandwich chain's shares and outlined in a letter to the board the steps it wants Potbelly to take to raise its share price, including franchising more of its restaurants. "We would strongly urge it to immediately pursue a sale/going-private transaction, as we do not believe the current strategy would be attractive for current or potential public/minority shareholders over any investable time frame," Ancora said. The Cleveland-based investor said in searching for a new CEO following the departure of CEO and Chairman Aylwin Lewis in August, the board should seek a candidate with significant franchise experience. Further, Ancora wrote, "We firmly believe Potbelly should seek out shareholder representation for its board," noting that it may seek its own board presence at next year's annual meeting.

At Mylan's (MYL) annual meeting on June 22, shareholders voted against the drugmaker's executive pay packages for 2016. The shareholder unrest centered on Chairman Robert Coury's $98 million pay package, including a $20 million cash bonus and $51 million of stock, making him the highest paid U.S. pharmaceuticals executive in 2016. His remuneration was almost four times higher than that of Johnson & Johnson (JNJ) CEO Alex Gorsky despite J&J's market value being 18 times larger than Mylan's. Last year, Mylan was widely criticized for making its life-saving EpiPen injector unaffordable at $600 for a two-pack. However, the campaign by some investors to oust Coury and CEO Heather Bresch was unsuccessful.

CenturyLink (CTL) has announced a new succession plan in which Level 3 (LVLT) CEO Jeff Storey will become the president and COO, and CEO Glenn Post will retain the post in the wake of the companies' merger. On Jan. 1, 2019, Storey will become CenturyLink's CEO, and Post will become executive chairman of the board. The announcement came just one month after investor Keith Meister suggested it. The merger is expected to close by Sept. 30.

Jonathan Litt is calling on Hudson's Bay Co. (HBC) to maximize the value of its real estate and avoid the mistakes of its rival, Sears Canada.  "Sears has been trying to remake itself as a department store and has not been—until recently—focused on monetizing the real estate," Litt, founder of Land & Buildings, told BNN in an interview.  "I think here [with HBC] if they focus on the real estate sooner rather than later, investors will be better off."  HBC has fared better than Sears Canada, which reportedly is on the brink of seeking creditor protection, but its shares dropped earlier this month in response to poor quarterly earnings and announced job cuts.  Litt, who owns a 4.3% stake in HBC, urged the department store chain in a letter Monday to sell or redevelop some of its most desirable locations.  Unlike many retailers, HBC owns its real estate assets, including the Saks Fifth Avenue location in New York across from Rockefeller Centre.  Litt estimates the real estate is worth $35 per share—almost half of that from the Saks Fifth Avenue property.  While operations currently are profitable in those locations, HBC could make even more by selling or leasing the space to other retailers, Litt said.  He added that the board and management are uniquely qualified and have done a good job identifying the real estate, but "the next step is to more aggressively redevelop those locations."

Etsy (ETSY) intends to slash its workforce by an additional 15%, bringing the total number of eliminated jobs to 230, or about 22% of its headcount, compared with the end of 2016. CEO Josh Silverman, who was appointed last month after the sudden departure of Chad Dickerson, is working to turn the company around. Despite almost $3 billion in sales last year, the online marketplace has seen a slowdown in transaction growth, and it posted an unanticipated loss in the first quarter of this year. Silverman plans to focus the company on its core marketplace instead of niche initiatives such as Etsy Studio, a sub-site geared toward do-it-yourself crafts and hobbyists, according to a source. The workforce reduction "puts us at our fighting weight" Silverman says. The company has been criticized by shareholder Black and White Capital, which last month described the company's website search function as "horrendous" at matching buyers and sellers with complex and quirky demands. Black and White has also counseled the company to consider a sale. Last month, after private equity groups Dragoneer and TPG purchased a combined 8% stake in the company, Etsy said it was "reviewing strategic and operational plans."

In a town hall with employees, Whole Foods (WFM) CEO John Mackey described Amazon's (AMZN) $13.7 billion deal to buy the high-end grocer as a "marriage" that was announced six weeks after a "blind date" with Amazon that he characterized as "love at first sight." However, some investors are concerned that the deal was hastily orchestrated and in Mackey's best interests rather than the best interests of shareholders. Shortly after Amazon offered $42 a share to acquire the company, its stock price started rising above the deal price, indicating that investors believed a bidding war could emerge and drive up the final price. Walmart (WMT), Target (TGT), Costco (COST), and Kroger (KR)—whose shares all plummeted after the deal was announced—have been named as potential rival suitors, but they have yet to enter the fray. Although observers say it is uncertain whether they would have the ability to outbid Amazon, it appears that they were never even given the opportunity. Meanwhile, Amazon's offer represented a 27% premium over Whole Foods' stock price, and analysts and investors have questioned whether it was too cheap. Charles Kantor, a managing director at Neuberger Berman Investment Advisers—which owns nearly 3% of Whole Foods—said the offer undervalued Whole Foods' brand. Jana Partners and other investors have pushed for a management shake-up at Whole Foods, prompting Mackey and his team to hire top defense banker Evercore, which helped facilitate the deal with Amazon that would enable Mackey and his executive team to retain their jobs.

Chinese tycoon Wang Shi has announced that he plans to leave the board of home builder China Vanke.  The announcement follows a protracted tug-of-war for control of the company, which appears to be over.  "I have decided not to be nominated a candidate since we were contemplating the transition," Wang confirmed.  "Today, I passed the baton to the leadership team led by [company president] Yu Liang.  I believe this is the best timing.  They are much younger, but fully mature.  I have full confidence in them and place a lot of expectation upon them."  Prior to the announcement, Vanke released the names of board candidates in a Hong Kong filing.  Wang's name was not listed.  Subway operator Shenzhen Metro in recent months has purchased the stakes of other Vanke shareholders, including state-owned China Resources and rival developer China Evergrande.  It now has become Vanke's largest investor, followed by Baoneng.

On June 20, investor Nicholas Bolton saw his reputation suffer when Molopo Energy shareholders snubbed his proposal to implement a new board.  Bolton used his control of Keybridge Capital and Aurora Funds Management as vehicles to gain a significant shareholding in Molopo.  Observers believe he could have succeeded were it not for interference from the Australian Securities and Investments Commission (ASIC).  After Aurora and Keybridge boosted their holdings in Molopo to 17.89% and 19.44%, respectively, ASIC made an application to the Takeovers Panel in April, on the grounds that Keybridge and Aurora were associated with one another and their collective 37.33% interest in Molopo was in violation of the Corporations Act.  Among other action, ASIC sought interim orders blocking Keybridge and Aurora and their respective associated entities from exercising any voting rights, acquiring any further relevant interests in Molopo, and disposing of any Molopo shares. It also sought final orders that any Molopo shares acquired by Keybridge and Aurora since July 4, 2016, be vested for sale and that Aurora and its associated entities be banned from making any further acquisitions of Molopo shares that would exceed a combined 20%.  At Molopo's June 20 annual meeting, in a blow to Bolton, shareholders voted in line with the board and rejected the candidates put forward by Keybridge and Aurora.

Cenovus Energy announced early Tuesday that CEO Brian Ferguson is retiring at the end of October—but one investor argues more change is needed. "It is a step in the right direction, but it's not enough," said Len Racioppo, managing director at Coerente Capital, which owns about 500,000 Cenovus shares. Racioppo cited poor execution and decision-making, and also noted the need for board change. "You need a pretty significant cultural change here," he said. Racioppo had asked regulators to halt the company's $17 billion purchase of ConocoPhillips (COP) assets in April. Ferguson's departure was announced just hours before the company held its investor day in Toronto, where the CEO was expected to face shareholder unrest over the ConocoPhillips deal. Racioppo did not rule out the prospect of engaging the company, but emphasized a greater need for consolidation within Canada's oil and gas sector. "It's possible," Racioppo said of activist intervention, adding, "I think this industry needs to consolidate. I don't know what kind of appetite others will have with the debt-level that Cenovus has, but those are all things that we'll look at."

Mitch Dawney, the former stockbroker behind an unprecedented offer for an option of 19.9% of oil and gas producer AWE, insists the Melbourne-based company should now pursue a sale to other parties. No money would change hands upfront, but the offer would grant Dawney the right to exercise the option at 56 cents a share by September. AWE was trading at 45 cents a share before the offer was announced. The shareholders who accept the offer also would have the right to 95% of the proceeds from any on-sale of the stake by Dawney above 56 cents a share. If he can orchestrate a sale to a third party, Dawney stands to collect about $50,000 for every cent above 56 cents a share. Dawney said the offer is a means for disgruntled shareholders to signal that they are unhappy and want the company to pursue a sale. "I obviously don't have $60 million to buy a 20% stake," he said. "I just feel that with north of 18,000 shareholders on the register, there's probably a few people who are feeling frustrated with how things are going and the serial underperformance." Dawney and his associate currently hold about 885,000 shares in AWE. According to RBC Capital Markets analyst Ben Wilson, the proposal is a novel approach that resulted in some share price momentum, but it likely will not get much uptake.

PointNorth Capital has succeeded in its campaign for board representation at Liquor Stores N.A. Ltd., putting an end to a bitter months-long proxy fight at the Canadian chain.  Liquor Stores announced on Monday that six of its eight board members—including Chairman Jim Dinning—would not seek re-election at the annual meeting on Tuesday, clearing the way for all six of the dissident investor's nominees.  PointNorth Capital, Liquor Stores' largest shareholder with a roughly 10% stake, had argued Liquor Stores suffers from low shareholder returns, excessive costs, and falling same-store sales in Canada.  The retailer said it came to its decision after reviewing shareholder votes already counted, which suggests PointNorth's campaign was well-received.  Pending Tuesday's vote, the new board will be responsible for delivering PointNorth's strategy for Liquor Stores, which includes cutting labor and other costs as well as renovating and rebranding all Canadian stores.  The battle at Liquor Stores even led to a complaint with Alberta's securities watchdog over a so-called vote-buying scheme by the retailer.  Claiming the scheme was against the public interest, PointNorth filed an application with the watchdog seeking to block any payments and have Liquor Stores punished for the move. Shareholder advisory firm Glass Lewis, which did not support PointNorth's bid for a complete board shakeup, did say that the current board should be held accountable for the "vote-buying scheme," recommending that shareholders vote against Dinning.  The securities commission declared Liquor Stores did not violate any securities laws, concluding the complaint failed to justify any action against the company.

Energen Corp. (EGN) has rejected Corvex Management LP's bid for change at the Alabama-based oil and gas producer.  The hedge fund disclosed a 5.5% stake in the firm last month and called for it to explore a sale, saying it had discussed its views with the company.  However, Energen announced on Monday that its board had unanimously chosen to stick with its own business plan after retaining J.P. Morgan and Tudor Pickering Holt & Co. to review strategic alternatives.  "This examination took into consideration input from numerous shareholders and analyzed Energen's top-tier assets, its improving execution, and the broader macroeconomic and commodity price environment," the company said in its statement. It remains to be seen whether Corvex will accept the company's decision or step up its pressure.

Parexel International Corp. (PRXL), under pressure from Starboard Value LP and other shareholders to explore a sale, confirmed Tuesday that private equity firm Pamplona Capital Management LLP will take it private.  Under the $4.5 billion deal, Pamplona will pay $88.10 per share in cash for the U.S. pharmaceutical research services provider, a 5% premium to the stock's closing price on Monday.  Parexel investors have argued that the company's profit margins have consistently straggled behind those of its peers.  Parexel offers a range of services to the pharmaceutical industry as well as leadership position in cancer drug research and a top platform for "real-world" data, which is sought after by drug companies seeking to justify their prices.  Pamplona has been trying to acquire a contract research organization in the last year and recently made an unsuccessful bid for Pharmaceutical Product Development LLC (PPD), a U.S. clinical trials firm valued at more than $9 billion.

Buffalo Wild Wings Inc. (BWLD) on June 19 identified 83 company-owned restaurants in Canada and the United States that it intends to sell to franchisees in 2017.  Mick McGuire of investor Marcato Capital Management has been urging executives to make such a move to improve shareholder value.  Shedding the company-owned restaurants is aimed at reducing capital spending and operational costs.  Earlier this month at the restaurant chain's shareholder meeting, McGuire launched a proxy battle for seats on the company's board and won three, including one for himself.  Buffalo Wild Wings' shares have declined approximately 13% since the meeting and closed June 19 at $137.60, near a 52-week low.  McGuire has previously argued that Buffalo Wild Wings should slash its portfolio of company-owned restaurants by 90% to about 60 or so.  Doing so would boost the company's share value significantly over the three or four years it would take to make the sales, he said.

Top BHP (BBL) shareholder Aberdeen Asset Management has backed Elliott Management's call for the miner to replace its dual listing with a primary Australian one, saying it would be better than the current structure if it could be done for a good price. "Ultimately, a single listing in Australia would be ideal because it is an Australian-based company and most of its business is here," said Andrew Preston, Aberdeen's head of corporate governance in Australia. Several of the non-Australian aspects of the company, which were the reason the dual listing in London was created in the first place, have been split off anyway, he explained. In April, Elliott called for BHP to dissolve the dual listing for a British primary listing, but later returned with a proposal for an Australian primary listing. The hedge fund, which claims a 4.1% stake in the London shares, says dissolving the dual-listed structure would release US$9.7 billion ($12.7 billion) of BHP franking credits more quickly. "The question of releasing franking credits to Australian investors is quite a key one," Preston said. "If that could be better achieved by a single listing here, then that would be positive for local investors in the company." But he emphasized that the costs need to be carefully assessed. BHP argues the cost would be US$1.3 billion but Elliott says it would be closer to US$200 million, saying that the dual listing's tax benefits are unsustainable because of pressure from the Australian Taxation Office. Aberdeen is BHP's second-largest shareholder, owning 4.9% of the company's London-listed stock and an undisclosed stake in Australian-listed shares.

Shareholders are backing Land & Building Investment's call for Hudson's Bay Co. (HBC) to maximize the value of its real estate. CI Investments portfolio manager Joshua Varghese said Monday he would like the company to address Land & Building's proposal. "I hope it will force the management team to address these issues in more detail with its shareholders," he said. CI is the company's sixth-largest shareholder with a 4.2% stake as of the end of last year, according to Thomson Reuters data.

Dan Loeb's Third Point reportedly is building an interest in Philips (PHG), sparking talk of a potential shakeup at the 125-year-old European electronics company.  The size of the stake is not known, but some sources suspect Third Point could be amassing a multibillion-euro position prior to launching an activist campaign.  Philips spun off its lighting division in 2016 and now has two primary divisions: medical equipment and consumer electronics.  Both Third Point and Philips have declined to comment.

On June 6, shareholders of General Motors (GM) voted overwhelmingly against hedge fund billionaire David Einhorn's push for a dual-class common stock structure, with 91% of the votes cast against the proposal. The shares cast by Einhorn's Greenlight Capital were just about the only votes in favor of the proposal, as 96% of non-Greenlight votes cast rejected it. Einhorn's efforts to get three directors on GM's board also were unsuccessful, with shareholders electing all 11 of GM's board nominees, who received between 84% and 99% of the votes cast. "We are disappointed that shareholders have elected to maintain the status quo," Einhorn said in a statement. "We congratulate GM's management on their win today."

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Underperforming Japanese Companies Face Investor Pressure
" Financial Times (06/25/17) Lewis, Leo"

Investors are facing unprecedented pressure to hold management of poorly performing Japanese companies accountable at this year's round of annual general meetings (AGMs), in an important test for Prime Minister Shinzo Abe's governance reform campaign.  Companies most clearly at risk of shareholder revolt include Toshiba and Fujifilm, both hit by high-profile scandals.  However, analysts say the CEOs of hundreds more companies that have repeatedly failed to meet return on equity targets could also be voted down for re-election by institutional investors.  Japan's round of AGMs—which peaks on June 29, when nearly 30% of listed companies meet their investors—is the first since a key revision to the country's 2014 Stewardship Code was made last month.  That revision requires institutional investors to report how they voted on each of the agenda items raised at the AGMs or provide an explanation for failing to do so.

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In Praise of Activist Investors
" Financial Times (06/25/17) van Steenis, Huw"

Activist investors can play an essential role in stimulating long-term thinking, according to Huw van Steenis, Global Head of Strategy at Schroder, a British multinational asset management company.  Efforts to restrict engaged investors reflect broader debate about the apparent short-termism in markets, the weaknesses in corporate governance, and the role of activists, he writes.  Executives perceive that short-termism is more acute than ever: a recent study found the majority of executives felt pressure to deliver results within two years or less.  Another concern is that a large proportion of investors are focused on short-term returns; yet it is difficult to find systematic evidence of short-termism in markets.  "The vast weight of money is looking for long-term value," von Steenis writes.  Another complaint is that companies are underinvesting to boost short-term profits.  However, R&D has stayed fairly constant as a percentage of GDP and percentage of sales.  Instead, companies are returning cash as the windfall gains of cheap borrowing costs due to quantitative easing are being returned to shareholders.  "Rather than passing new laws, we should welcome activist and engaged investors which can be an important catalyst for change," the author suggests.  According to a Harvard study of 2000 interventions by activists, companies' operating performance was materially improved five years after activist intervention.  "That is not to say there aren't short-term activists, or that all engaged investors proposals are good … A keen focus on appropriate incentives and corporate governance is a critical ingredient," von Steenis concludes.

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Opinion: Index Funds Are Great for Investors, Risky for Corporate Governance
" Wall Street Journal (06/22/17) Henderson, M. Todd; Lund, Dorothy Shapiro"

A broad-based indexing strategy is great news for investors, who will pay less and get better returns, but it has troubling implications for corporate governance. No passive investor cares much about governance of a particular company, so it is a problem when these investors control voting outcomes for the companies that they invest in, considering 88% of public companies count one of three large institutional investors—State Street Global Advisors, Vanguard and BlackRock—as their largest investor, write professor M. Todd Henderson and teaching fellow Dorothy Shapiro Lund at the University of Chicago Law School. And because there is no such thing as universally good governance, the blind application of one-size-fits-all governance solutions across vastly different companies often has negative effects. So how can the law ensure that these institutions make informed decisions about corporate governance? One possible approach is to encourage them to rely on third-party corporate governance experts. Academic critics have identified cases of biased and self-serving behavior on the part of these advisers, so a second approach is to create in-house governance teams that make recommendations to a fund's managers. However, these teams may not be up to the task—as of October 2016, Vanguard employed 15 people to cover some 13,000 companies, for example. A third option is to leave decisions to those with an incentive to be informed. Having passive institutional investors abstain from voting would concentrate the voting power of active investors that have the motive and information to vote intelligently, according to Henderson and Lund.

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Investor Activists Skeptical About MSCI China Inclusion
" Reuters (06/22/17) Price, Michelle"

Investor activists and analysts say MSCI's move to add China-listed stocks to a major benchmark will expose investors to weak corporate governance in the country. The U.S. index provider said on Wednesday it would add 222 China-listed large cap stocks to its Emerging Markets (EM) Index, tracked by around $1.6 trillion in assets. The decision follows a number of corporate scandals and a surge in public campaigns by activist investors alleging problems with fraud, financial engineering, and market manipulation. Some governance activists are questioning MSCI's decision. "Is this the right time for global investors to have to be exposed to China? It's hard to argue that the level of investor protection, regulatory consistency, and overall corporate governance in China is high enough," said Jamie Allen, secretary general of the Asian Corporate Governance Association (ACGA). Government interference at listed companies has grown after Beijing began imposing Communist Party committees at state firms. These committees can overrule the board of directors, marking a "step backwards" for China corporate governance, said Allen. However, some say the challenges also come with opportunities. "All the problems that people complain about, including a lack of transparency and corporate governance, all create investment opportunities," said Qi Wang, a former MSCI executive director and currently CEO for asset manager MegaTrust Investments. "Governance in Chinese companies is so varied, it creates alpha opportunities for those who can see through these issues."

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The Only Company This Investor Isn't Taking on Is His Dad's
" Bloomberg (06/22/17) Natarajan, Sridhar; Burton, Katherine"

Zach George's hedge fund, FrontFour Capital Group, appears over time to have softened its approach to pressing for corporate change, especially when it comes to his father's company.  FrontFour has maintained its position in Penn West Petroleum Ltd. (PWE)—where his dad, Rick George, is chairman—even as the stock has dived nearly 90% since the firm started buying it more than four years ago.  Given the potential conflicts, FrontFour amended its compliance rules as soon as Rick George joined the Penn West board in 2013.  FrontFour regards Penn West, its biggest U.S. stock position at the end of the first quarter, as a turnaround project.  Although the company had roughly $2.7 billion of debt when the hedge fund first considered buying shares, it also had assets it could sell to repay the loans; and big shareholders were already pushing for change, sources say.  Yet Penn West was hit by an accounting problem in 2014 that forced it to revise some financial statements, followed by a decline in global oil prices.  FrontFour was meanwhile boosting its stake to 3.4% stake, making it the company's second-largest investor.  Penn West's total debt was cut to $289 million at the end of the first quarter.  But its stock, which more than doubled in 2016, is down again more than 30% year-to-date.  FrontFour insists Rick George will not get a pass.  "The family connection in no way rules out the firm's ability to take an activist position in Penn West if we perceive that management is not doing its job or there is an opportunity to create value for shareholders," said FrontFour partner Stephen Loukas.

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Say-on-Pay Laws Are Doing Their Job, UGA Study Finds
" Post Searchlight (06/20/17)"

When shareholders have a say on executive pay, CEO salaries fall and company valuations increase, according to a University of Georgia study. Researchers analyzed financial data from over 17,000 publicly traded companies in nations that have passed say-on-pay laws and countries that have not. They found that such laws tie chief executive pay more closely to their firm's performance and increase compensation equality among top managers.  A total of 11 developed countries passed such laws between 2003 and 2013. "That gave us a natural laboratory where we could see what effect these laws actually had," said study co-author Ugur Lel. "We found that, on average, CEO pay declines by about 7% and its sensitivity to firm performance increases by 5%."  Say-on-pay laws, such as the 2010 Dodd-Frank legislation, mandate company shareholders have an opportunity to vote on executive pay packages.

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Investors Unite Behind Common Governance Principles, Finds EY
" IR Magazine (06/20/17) Roach, Garnet"

The 2017 proxy season has been marked by the launch of the voluntary Framework for U.S. Stewardship and Governance, which takes effect January 2018. According to the EY Center for Board Matters' 2017 proxy season review, 38 U.S. and international investors, with an aggregate of more than $20 trillion invested in the U.S. equity markets, are now signatories. Some of the world's largest investors are now united behind key corporate governance principles for U.S.-listed companies, write the review authors. "As a result, companies may face increased pressure to come in line with leading practices related to board accountability to shareholders, shareholder voting rights, board leadership structures, board effectiveness practices, and the alignment of pay with long-term strategy." The framework may signal a time of "increased transparency around corporate governance." Investors might be looking to talk to companies about diversity, the gender pay gap, and sustainability. EY also highlights proxy access, unequal voting structures, and virtual annual general meetings as areas of interest from the 2017 proxy season.

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No More Quiet Chats? Australia Becomes New Frontier for Shareholder Disruption
" Reuters (06/20/17) Freed, Jamie; Keidan, Maiya; Subhedar, Vikram"

Activist funds increasingly are targeting Australian firms, taking advantage of Australia's shareholder-friendly laws to pressure corporate boards that they argue are clubby and conservative. "Whereas before it was quite normal for companies to address any potential shareholder activism in Australia behind closed doors, only now is there a real appetite to go public and to take the message direct to shareholders," said Michael Chandler, governance director at shareholder engagement firm Global Proxy Solicitation. According to Activist Insight, activists publicly targeted 26 Australia-listed companies during the first five months of this year, up 25% from the same period five years ago. The number of targets is on par with last year, but the size of targets has increased. Activist shareholders have won board-level resignations or strategy changes, signaling that the strategy has been successful. Activist Insight shows that more engagement is coming from overseas, with David Hunker, head of shareholder activism defense at J.P. Morgan, noting that "the U.S. markets are a bit saturated, so (activist investors) look at the markets that don't have as much activist focus at the moment and that are most similar to the U.S." Gabriel Radzyminski, managing director of Sandon Capital, says, "None of the big name marquee activists have really made an attack down here publicly until Elliott," referring to Elliott Management's campaign against BHP Billiton (BBL). "You've got to have an appreciation for local mores and customs. It doesn't mean foreigners can't do it, but you have just got to be conscious."

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Amazon/Whole Foods Deal Bolsters Tourbillon's Stake in SunOpta
" Opalesque (06/21/17) McCann, Bailey"

Tourbillon Capital Partners late last month called for organic-food company SunOpta Inc. (STKL), in which it holds a nearly 10% interest, to put itself up for sale. Subsequently, Amazon's (AMZN) acquisition of Whole Foods (WFM) was announced.  Although the two actions seem unrelated, Tourbillon CEO/CIO Jason Karp recently argued at a conference that the Amazon deal effectively amounts to a SunOpta sale.  SunOpta provides white-label organic food, and one of its largest clients is Whole Foods.  SunOpta sources and creates the products in Whole Foods' "365 Everyday Value" generic brand.  Given the Amazon/Whole Foods deal, Karp predicts that 365 likely will be sold online as part of grocery delivery service Amazon Fresh.  "Amazon understands that Millennial consumers aren't focused on brand-name products.  They are focused on markers of quality or markers of values like organic groceries," he said.  "One of the biggest focus areas for Amazon is the private label market and with this deal, SunOpta is poised to be a significant Amazon supplier."  Roughly 50% of the available shares of SunOpta are controlled by Tourbillon, Oaktree Capital, and Engaged Capital.  Before the Amazon/Whole Foods deal was announced, SunOpta was working with Karp and other shareholders on a turnaround plan.  SunOpta's share price has declined 45% over the past year, leading to concerns about the management team.  Over the past several months the company has replaced its board with food industry veterans, closed underperforming facilities, adjusted pricing, added channel-specific sales teams, and filled out the c-suite with experienced management and supply chain personnel.

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Brokers May Be Giving Away Investors' Best Ideas
" Institutional Investor (06/20/17)"

A new paper from the National Bureau of Economic Research reveals that brokers may be passing their top trade ideas from clients to other institutional investors.  According to authors Marco Di Maggio, Francesco Franzoni, Amir Kermani, and Carlo Sommavilla, when a major broker executes a well-informed trade for one client, the transaction is followed by a "significantly higher volume" of other institutional investors making similar trades through the same broker.  The research suggests that it is possible for investors to "free-ride" on a client's good idea when brokers share information on trade orders.  The authors studied data from Abel Noser Solutions on trades executed through brokers from 1999 to 2014 and determined that asset managers may receive tips about moves made by activist investors before they are publicly disclosed. Specifically, they found that when an activist investor executes a trade through a broker, other clients of that broker tend to buy the same stocks prior to the filing of a 13D.  "There are 10 days in which the only market participant knowing about the activist's trades is the broker.  This strongly suggests that these investors were made aware of the interest in that particular stock by the broker," they wrote.

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Women Lose Ground on New Board Seats for First Time in 8 Years
" Crain's Detroit Business (06/20/17) Green, Jeff"

Fewer than 28% of the 431 open board seats in Fortune 500 companies were awarded to women in 2016, down from 30% in 2015, according to Heidrick & Struggles. This marked the first year-to-year decline since the executive recruiter began tracking director appointments seven years earlier. Boards are often looking to fill vacancies with people who have been CEOs or CFOs, noted Bonnie Gwin, co-head of the global CEO and board practice for Heidrick & Struggles. Both of those roles, though, are disproportionately staffed by males. Among new directors, 50% were current or former CEOs, 16% were current or former CFOs, and 75% had previously served on a board.

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Seattle Love, Dread of Activist Investor Help Clinch Amazon M&A Roles
" Reuters (06/17/17) Hirsch, Lauren"

Bankers played a key role in Inc.'s (AMZN) $13.7 billion acquisition of Whole Foods Markets Inc. (WFM), and the deal—Amazon's first valued at more than $1 billion—paid off handsomely.  Goldman Sachs Group Inc. advised Amazon, and Evercore Partners Inc. advised Whole Foods on the deal; but both had laid the groundwork for months.  Last year, Goldman sent investment banking veteran David Eisman to Seattle to help lead a team tasked with strengthening relationships with the city's biggest companies.  When Amazon decided to approach Whole Foods last month, it selected Goldman for advice.  Evercore itself secured a role in the deal after hiring Goldman's head of activism defense, Bill Anderson, who has advised more than 175 companies on how to deal with activist investors and hostile bids.  When Jana Partners LLC in April called for a sale of Whole Foods, the company interviewed several investment banks to hire an adviser to help defend against the hedge fund.  "From the moment Jana had announced its stake in Whole Foods ... an onslaught of attention from media and banks ensued," Whole Foods' CEO, John Mackey, said in a Texas Monthly article this month.  Whole Foods' talks with banks took place before the company was approached by Amazon, so Goldman was also seeking a role with Whole Foods.  With Anderson among its ranks, however, Evercore won out.  When Amazon approached, Whole Foods turned again to Evercore for advice.  Goldman now stands to receive $30 million to $35 million in advisory fees—including additional money for debt arranging fees—while Evercore stands to receive $40 million to $50 million, according to estimates from investment banking advisory firm Freeman & Co LLC.

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Index Funds Are Unsure of Taking on Policeman Role
" Financial Times (06/19/17) Indap, Sujeet"

The largest U.S. index fund managers say they deliberately take a different approach from activist hedge funds when providing advice to the companies in which they invest. These funds have to own shares in the largest companies and, thus, function as permanent capital, or what Vanguard calls "forever owners" and genuine advocates for long-term value creation. "We believe companies that are governed well perform better over the long term. Our interest is to advocate for governance behavior that is oriented toward long-term performance," says Glenn Booraem of Vanguard. The index funds indicate that they are less interested in short-term measures, such as share buybacks, and more concerned about such loftier matters as the skills of board members, executive pay, and whether the company structure is friendly to shareholders.

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Meet the Legislation Designed to Stifle Shareholders
" New York Times (06/16/17) Morgenson, Gretchen"

After it was determined last year that Wells Fargo (WFC) had opened thousands of sham accounts for customers, the bank's board forced then CEO John G. Stumpf and former community banking unit head Carrie L. Tolstedt to return a combined $60 million in compensation. However, the clawback would not have occurred under the Financial Choice Act, the deregulatory bill passed by the U.S. House on June 8. This is because the pay recovery was largely the work of a single Wells Fargo institutional investor—New York City's pension funds—and the Choice Act limits the ability of shareholders to petition the board for clawbacks by placing severe restrictions on who can make such a request. This means that if the bill becomes law, it will put a damper on one of the main tools investors have to keep company managers responsive to their owners. Under the bill, a shareholder would have to own at least 1% of a company's shares for three years to get a proposal on a proxy ballot. Currently, an investor must only own $2,000 worth of stock for a year or more. Observers note that the Choice Act would make it impossible for small investors to be heard.

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