Investor Communications Network, LLC


10 Questions with Bruce Goldfarb

The Activist Report - Volume 2 Issue 9 - September, 2012

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 our clients.

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 cast.

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 to recall?
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 the future?
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.