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Hewlett Packard to Vote on Proxy Access - A Major Victory For Activists?

By Kenneth Squire - The Activist Report - Volume 2 Issue 3 - March, 2012

Earlier this month Hewlett-Packard announced that, succumbing to pressure from stockholder Amalgamated Bank, the Company agreed to put a board recommended proxy access proposal to a vote at the 2013 annual meeting of stockholders. The Wall Street Journal and others described this as “a major victory for activists.” If the proposal passes, stockholders who own at least 3% of HP shares for at least three years would be allowed to nominate up to 20% of the Company’s directors in the Company’s proxy statement. Because corporate director elections in the United States have been so one-sided for so long, this is actually considered a “major victory.” But take a closer look at what it really allows and doesn’t allow.

A shareholder must own 3%. HP’s market cap is $52 billion. 3% is $1.56 billion. So mere millionaires need not apply. Assuming that a prudent investor does not put more than 10% of his assets in any one investment, this rule is tailored for only investors with more than $15 billion of assets. Hardly a conquest for the average investor. Presently, the Company has four stockholders who own enough stock to take advantage of this rule – Dodge & Cox (5.92%), State Street (5.36%), Vanguard (3.97%) and Blackrock (3.55%), all passive investors, none of whom has ever nominated a candidate to a US board in opposition to management. Moreover, only Blackrock has held the required amount for three years. It is just a little ironic that a Board who collectively owns .01% of the Company’s common stock (excluding shares indirectly owned by activist investor Ralph Whitworth in his capacity as GP of Relational Investors) is requiring a shareholder to own more than 3% just to nominate a director on the Company’s proxy. While stockholders may be able to aggregate to meet the 3% threshold, the likely requirements and potential liabilities to aggregation makes this extremely unlikely.

Must be a shareholder for three years. So, owning $1.56 billion of stock is not sufficient to nominate three of the Company’s 14 directors, the stockholder also has had to own 3% for three years. This rule would prohibit nominations from stockholders who have owned 2.5% ($1.3 billion) of stock for ten years or even stockholders who own 10% of the Company for 2.5 years. If you are a stockholder who is unhappy with management and the direction of the Company, three years is an awfully long time to have to witness the deterioration before being allowed to nominate a director on the Company’s proxy. Certainly, a real activist investor would not wait three years. On December 31, 2000, Enron had a stock price of $83.13 and a market capitalization of $60 billion. On December 2, 2001, less than a year later, the Company filed for bankruptcy. In January of 2007. Lehman Brothers was trading at $82.24. We all know what happened to them less than two years later on September 15, 2008. There are some tools available to stockholders to act more quickly, but many companies, like HP, make those tools difficult or impossible to use. Stockholders are usually allowed to call a special meeting. However, at HP only shareholders owning 25% or more of the Company’s common stock can call a special meeting, which means getting the top 8 shareholders together. Many companies also often allow stockholders to act by written consent. Not at HP. They do not allow this. So, even if a majority of shareholder want to replace directors, they cannot do this by written consent. So the only realistic option is to wait for the next annual meeting and commence a costly proxy fight.

The Rule is only to Nominate Directors. HP is not saying that their largest shareholders can appoint a director, or even include a director on management’s slate. They are saying these are all the hoops you have to jump through just to compete with management’s slate on a level playing field by having access to the same proxy.

Minority of Directors. If you are a stockholder that has a $1.56 billion investment in HP and you have had that investment for three years, you will have access to the Company’s proxy, but only to nominate 20% of the Company’s directors (in HP’s case, three of fourteen). Again, let me reiterate. These aren’t directors the stockholder is appointing, just nominating – giving shareholders a larger selection of candidates from which to choose from. Why cap it at three? Why not allow this extremely large, long term shareholder to nominate a full slate? It will give the shareholders a better selection of competent directors to choose from; since it is on the Company’s proxy, shareholders will be able to mix and match from the two slates and will not be forced to vote for one full slate versus the other; and the only way that a majority of the board will be replaced is if a majority of shareholders vote for that.

Why are we protecting management at the expense of shareholders? What is the HP Board and other US public company boards so afraid of? Are they afraid that their incumbent nominees will lose? Isn’t that even more of a reason to allow a full contested election? If they want to defeat dissidents, they should appoint more qualified directors or make a better argument for their candidates, but they shouldn’t do it by making it harder to nominate or vote for dissident nominees. Do they think that contested elections will be distracting to running the business? There really is not a lot of campaigning going on in corporate elections, it is not very time consuming and the time it would take would be a small price to pay to make sure the Company has the best board possible.

You would hope that everyone (shareholders, management, regulators, etc.) would have the same goal – how to create the fairest system to get the most qualified board to run the Company. Clearly, the present system is not fair nor does it result in optimal directors. Under the present system, only incumbent directors are nominated, all of whom run unopposed, unless a sophisticated, experienced, activist shareholder spends the time and money to distribute their own proxy statements and campaign against incumbent management. Moreover, even in a contested proxy fight, the best nominees are not necessarily elected because shareholders are essentially forced to show up at the meeting to vote their shares (which most do not do) or side with one slate over the other. It does not give them the full options of mixing and matching all nominated directors. Allowing a small minority of nominees by only the largest shareholders is fractionally better, but still not close to a level playing field.

Why not allow any shareholder to nominate as many directors as they would like on the Company’s proxy by providing the consent of the nominee and a payment that goes towards the cost of the election. The payment could be set so to prevent frivolous nominations, the Company would benefit by offsetting printing and distribution costs and the shareholder would gladly pay the cost as it is likely a lot less expensive than having to print and distribute his own proxy or hold his position for three years while he is unhappy with management. Incumbent directors are not spending their own money on their re-election, they are spending shareholder money. So why not allow shareholders to be on the same proxy that they are paying for? Why is it fairer to make them spend their own money? Having a universal ballot will also lead to a better board because it gives shareholders a greater choice, a larger selection of competent nominees and an ability to mix and match their votes. The only ones that it hurts are inferior directors. Is that who companies and the SEC are trying to protect?

So, is this a “victory for activists”? Not by a long shot. First, it is not a victory for anyone, except maybe HP, who can look shareholder friendly by including a proposal at their 2013 annual meeting (not their March 21, 2012 annual meeting for some reason) that nobody will ever use. Second, if enacted it is a rule that even the largest activist investors would never use, as they would never wait three years and be restricted by the 20% of directors rule. At the very best you could call it a minor victory for the world’s largest pension funds. But neither activists nor the world’s largest pension funds need “victories”. They are both doing fine. How about creating a system that helps all shareholders? Then, the Wall Street Journal can write an article applauding HP and talking about “victories.”