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.”