Bruce H. Goldfarb is a founder of Okapi Partners and serves as President and Chief
Executive Officer. Bruce works extensively with corporate and mutual fund clients,
as well as third party investor and shareholder groups, including private equity
sponsors, hedge funds and arbitrage firms, in solicitation and investor response
campaigns. He focuses on proxy solicitation strategy and execution for mergers and
acquisitions, proxy fights and other extraordinary transactions. Bruce has been
kind enough to take time out of his busy schedule to sit down with us for this month’s
edition of 10 Questions.
13DM: Describe the role of a proxy solicitor during a proxy contest.
Talk about both the technical role and the advisory role.
BG: The most important aspect of our role as proxy solicitor is
to assist our clients with investor response to a campaign. During the planning
stages of a potential proxy contest, our job is to map out the “path to victory”
and help our clients take an objective look at all of the related issues. We typically
start by identifying the current investors and advising our clients on how these
investors have responded in similar situations. We also play an important part of
the client team, along with lawyers, bankers and PR professionals, in crafting the
message for investors and making sure the message is being delivered to the right
audience and getting heard. Stockholder ID and related analysis exemplify how proxy
solicitation requires technical execution as well as good strategic advice and judgment.
Ultimately, clients rely on a proxy solicitor to create the right data and then
help decipher it in a timely and accurate way. In a proxy fight, there are dozens
of “technical considerations” from setting a record date, demands for books and
records, crafting the proxy card, mailing materials, and planning meetings with
investors. On the advisory side, we really focus on how the campaign’s messaging
will resonate with each investor and the proxy advisory firms. We pride ourselves
in our knowledge of investor behavior and using that knowledge to the benefit of
13DM: What qualities make up a good proxy solicitor? I assume institutional
contacts are valuable.
BG: Institutional contacts are indeed extremely valuable and allow
us to be efficient in our investor response campaigns. Having been in charge of
the proxy voting process for an institutional investor prior to directly getting
into the proxy solicitation business, I understand the voting process and know many
people in the industry well. (I also served as an executive officer for a number
of closed end funds that were under attack by activists so I learned much of the
skills from the client perspective first.) Relationships do matter for our business
but a client still has to have a message that will resonate with investors to get
support. Today we are finding that investors are increasingly sophisticated and
are more interested in the “science” of each campaign. A good proxy solicitor in
2012 must have a keen understanding of the specific issues on each campaign. A good
proxy solicitor must be able to have insightful discussions with portfolio managers,
analysts, and corporate governance professionals. A good proxy solicitor appreciates
the nuances of each campaign and does not rely on the “same-old-playbook.” A good
proxy solicitor is an excellent listener. And a good proxy solicitor can share the
passion of the clients they represent on campaigns while also providing dispassionate
advice when necessary.
13DM: You represent both companies and activists. What are the
main differences between company and activist representation?
BG: When working with an experienced activist, we spend most of
our time focusing on the strategy of the campaign and soliciting investors. With
first-time activists or with most companies in an extraordinary situation, it will
be their “first rodeo,” so you have to explain the process in detail in addition
to providing advice and execution. It’s very helpful if the other advisors on the
campaign (lawyers, public relations professionals, bankers) are experienced in proxy
fights as we can all mutually coach a client through the process. Each side brings
unique perspective to a proxy campaign. As insiders, companies typically have the
informational advantage over the activist and sometimes significant resources to
devote to the campaign. Companies should be well-equipped to defend their strategy
and discuss opportunities they see for future growth and shareholder value creation.
There is sometimes less complication in creating messaging from the activist side—there
are likely no FD issues, there is less worry over how the message will play relative
to other plans within the business and hence there is less internal and external
clearance required. Many economic activists also have the advantage of being focused
on shareholder value as the main objective. Activists tend to be less distracted
by the day-to-day operations of running a company and this focus can create interesting
and fresh ideas.
13DM: How important is it to receive the recommendation of proxy
advisory firms such as ISS and Glass Lewis in a proxy fight? Is it more important
if you are the activist than the Company?
BG: I have seen a wide range of statistics on the influence of
proxy advisors ranging from 5% to over 50% for various situations. The truth is
that each campaign is different and requires a fresh review. We have worked on campaigns
where more than 70% of the votes were flowing through ISS and campaigns where ISS
clients held almost no meaningful voting position, just a few hundred shares in
one case. We have seen campaigns where Glass Lewis clients have more shares than
ISS clients. You can receive a positive recommendation from ISS and Glass Lewis
and still lose – or a negative recommendation and still win. That being said, it
is always better to get the recommendations of the proxy voting advisors, especially
in a situation where every vote matters. And, the messaging and PR value of the
recommendation can also be impactful to the results. I think that its under-appreciated
how institutional investors have varying degrees to which they are influenced by
their proxy advisors. Some quantitative investors exclusively follow their proxy
advisors but most investors allow for engagement that goes beyond the recommendations
of ISS or Glass Lewis. It’s also underappreciated that both ISS and Glass Lewis
are trying to reflect the views of their institutional investor clients so it becomes
a chicken or egg situation and difficult to quantify their influence. If I had to
generalize about which side would benefit more from the endorsement of the proxy
voting advisors, it is probably more important to the activist campaign. Some investors
vote with management in almost every situation so it is helpful for activists to
have additional ammunition in the form of third party proxy advisory support to
win a campaign. For institutional investors who rely on ISS and/or Glass Lewis to
provide research, it is easier to partly justify support for an activist if the
proxy advisor is voting that way, too. There is a perception that voting with the
recommendation to support an activist can provide cover for the portfolio manager
who agrees that change is necessary at a company but also wants to maintain his
or her relationship with that company. Interestingly, there is also a perception
that it is difficult to vote against management when the proxy advisors have sided
with management-- that this type of vote would be perceived as aggressively hostile
and damaging to a relationship between the investor and the company.
13DM: What role does a proxy solicitor take in preparing for and
engaging the proxy advisory firms?
BG: We are typically the main conduit for our clients to communicate
with the proxy advisors. We schedule the meetings, help our clients understand what
the sensitivities of each firm are, and help prepare materials for the meeting.
We will speak with the proxy advisors in advance of any meeting to evaluate how
knowledgeable they are on the situation. Are we telling the story from scratch or
are we diving-in to the main issues? We also like to do a practice meeting where
we literally rehearse the meeting. Clients often get overly anxious for the proxy
advisor meetings and we find that rehearsing in advance helps them feel appropriately
prepared for the real meeting. We remain the conduit for engagement if issues require
clarification or facts change through the release of the report.
13DM: You have been a proxy solicitor for over 12 years. What are
the biggest differences in proxy fights today from when you first started?
BG: It’s really even longer than that. I’ve been involved in solicitation
campaigns first as a lawyer and then at an investment management firm since 1990
and there have been many changes in the proxy fight process. As with most investing
activity, technology has played a real role in making the process faster. Messaging
by press release can create instant investor awareness now and both sides run different
campaigns today partly for that reason. There has also been a real change in the
perception of activism. Activist investing has become its own accepted asset class.
Other investors are aware of the active players and have seen what they can (or
can’t) do for their portfolio companies. In general, there is more support for activism
than there used to be. We have discussed proxy voting advisors and their influence
already, which has been a big change in the past decade. Even with more of an influence
from the proxy advisors, as a solicitor, we find that there is a lot more involvement
from portfolio managers and analysts which has made the activists fine-tune their
messaging and elevated the overall discourse. “Who you know” has become less important--but
not unimportant as a company that does not know its shareholders will have a real
issue in a proxy fight--while the ideas on how to increase value have become significant
focus points. In addition, many investors understand that they must provide policies
and guidelines under which their votes are cast and these investors must ultimately
disclose how they voted. That disclosure requirement has impacted how votes are
13DM: There is a practice in the mutual fund world of loaning out
shares for a fee, and as a result funds often are unable to get all of their shares
back in time to vote them at contested elections. How rampant is this, what is a
solicitor’s role, if any, in making sure shareholders have all of their shares to
vote and at what point do you know for sure how many shares a stockholder was able
BG: It is a very wide-spread practice for some investors to make
their shares available for securities lending programs. The income generated from
securities lending programs can be meaningful to these investors and in order to
compel an investor to recall their shares, you must make a strong case that the
economic impact of the vote will eclipse the securities lending income. We spend
a lot of time with our clients helping them understand the potential impact of shares
on loan. Depending on the short-interest in a company, securities lending can be
outcomedeterminative on a campaign. In certain instances we will reach out to targeted
investors and suggest that they recall their shares in advance of the expected record
date. Investors are typically appreciative of the advance notice but we find that
they rarely call their shares back.
13DM: There has been much talk about proxy access in recent years
and although that talk has died down immensely, what do you think would be the practical
effect of a proxy access rule like the one explored by the SEC?
BG: In the ultimate, there would not have been much impact. There
are very few situations where investors who meet the continuous ownership requirements
would have interest in a proxy access campaign. I believe that we would have seen
a spike in the threat of campaigns, with labor unions and pension funds looking
to take advantage of the new rules but very few campaigns would come to fruition.
The economic activists we speak with indicated that they would still send out their
own materials and proxy card.
13DM: There are stock watch companies and professionals who assist
in proxy fights by identifying the current stockholders of companies as opposed
to the holders reported in periodic SEC filings. How important are stock watchers
in proxy fights and is it an easier task when working for the Company than the activist?
BG: If management has engaged in a good investor relations program,
there will be a significant knowledge advantage to the management side. Frequently,
however, it is a company who has not communicated well with investors who becomes
the target of a proxy fight and sometimes we find these companies do not know their
shareholders as well as the activists do. Obviously there can be a lot of turn-over
when a proxy fight becomes public. We find that stockholder ID is especially important
first as the record date approaches and then as the vote starts to trickle-in to
identify who has and has not voted. In proxy fights, usually both sides are entitled
to the same shareholder lists at some point. When both sides have the same information
there should be no advantage to either side but management usually has a timing
advantage. Of course, part of stockholder ID is making numerous phone calls to investors.
In these instances, the more diligent side will typically get more information.
13DM: What trends do you see in proxy fights? Any predictions for
BG: As the markets continue to be volatile, we will continue to
live in a world where investors “put their mouth where their money is”. We will
see activist campaigns threatened at targets of larger sizes and possibly more activism
outside the US. Most campaigns will settle but we will witness companies becoming
more aggressive in bringing their case to investors, which is probably good for
all investors. Activists have become a lot more creative in recent years. The ideas
coming from activists often go well beyond “sell the company” or “do a buyback.”
Activists have presented ideas about spin-offs, monetizing real estate portfolios,
and even how to change the culture of management teams. I believe this advancement
of more sophisticated ideas to increase shareholder value in proxy fights will continue
and we will witness more sophisticated shareholder engagement from all sides.