Elliott's Best Bet With Bayer Is a Breakup
" NASDAQ (12/10/18) Proud, Liam"
It was recently revealed that Elliott Management has owned a stake in Bayer (BAYRY) for more than a year, during which time the company's stock has tumbled about 40%. Observers note that the hedge fund's best bet might be to engineer a breakup. Bayer CEO Werner Baumann has a plan to grow sales and EBITDA by 4% and 9% a year, respectively, through 2022, which if successful would result in earnings per share of about 10 euros in that year, or more than double their current value when using a 14 times forward earnings multiple. While Baumann wants EBITDA to reach 16 billion euros in 2022, analysts believe it will be just 15.1 billion euros. Observers note that Elliott could instead push Baumann to sell or spin off the different divisions, but breaking up the company would not be easy. Such a move would be hard to get past Germany's union-elected board members, and it would need the support of other shareholders, including Singapore's sovereign wealth fund Temasek, which owns 3.65%.
Women Hold Fewer Than 5% of CEO Positions in U.S. and Europe
" Financial Times (12/09/18) Edgecliffe-Johnson, Andrew"
According to a study by Heidrick & Struggles, women account for less than 5% of the chief executive positions in the United States, United Kingdom, and Europe. Although awareness of the executive gender gap "is at a crescendo," change is taking a long time, said Anne Lim O'Brien, vice-chairman of Heidrick's global CEO and board practice. She said boards need to focus on helping women gain the experience necessary to become "CEO-ready" and called for a culture shift to address unconscious bias in board appointments. The report follows a study published in October which found that women made up 40% of all employees and 35% of all managers in the S&P 1500 U.S. companies that disclose diversity metrics, but just 20% of directors and 6% of chief executives. Some countries have set targets to increase their share of female directors. For example, France has set the pace for boardroom diversity in Europe, beating its target of having women hold 40% of CAC 40 directorships by 2017, according to a recent report.
Should 41's Legacy of Civility Extend to the Boardroom?
" Forbes (12/07/18) Peregrine, Michael"
Michael Peregrine, a partner in the Chicago office of international law firm McDermott Will & Emery, says the public discussion about President George H.W. Bush's dignity, honor, kindness, and rectitude in the aftermath of his death could apply to corporate governance, presenting a unique opportunity to consider the role of comity and cooperation in boardroom functions. "Governance experts such as Martin Lipton have long articulated a distinctly civil expectation for boardroom discourse. At its core, this envisions a tone at the top that establishes a corporate culture that gives priority to ethical standards, professionalism, and integrity. It describes the board/CEO dynamic in terms of a 'working partnership,' rather than an adversarial relationship. And it calls for a 'truly collegial' culture within the board, and in its relationship with management. More recently, the new Commonsense Principles 2.0 declares that collaboration and collegiality are critical for a healthy, functioning board, and urges directors not to be divisive or self-serving," he says. "These principles and guidelines signal a desire for productive, respectful boardroom engagement; that appropriate scrutiny of ideas and proposals can co-exist with decorum and fiduciary duty...The current, and possibly fleeting public conversation on civility offers a unique teaching moment for corporate boards. Pro-active board chairs and CEOs may use the opportunity to engage with their colleagues on proper boardroom discourse."
Old-School Activism Still Produces Results for Dan Loeb
" Financial Times (12/05/18) Fortado, Lindsay"
Although traditionally bruising proxy battles have fallen out of favor recently, Dan Loeb proved in two victories last week that such fights can still pay off. In one victory Campbell Soup (CPB) gave Loeb's Third Point hedge fund two board seats, plus additional concessions. In another, United Technologies (UTX) decided to split into three companies. Loeb is a throwback among a growing number of activists who are redefining their investing strategy as "constructivism," essentially "playing nice" and working with management behind the scenes. Funds like Cevian Capital, ValueAct, and Trian Partners have paved the way for a less aggressive style over the years. Still, Loeb and others such as Carl Icahn and Elliott Management seem to relish a fight. Even funds like Trian Partners, which prefers to be referred to as an "active shareholder" instead of an activist, has become more aggressive lately.
Activist Investors Are Spending More and Shifting Their Strategies
" Wall Street Journal (12/06/18) Whittall, Christopher"
Activist investors, spending more cash than ever, are shifting their attention to new companies and honing their strategies, according to a new report from Deloitte. Activist hedge funds currently have invested almost $300 billion, according to the report. About $74 billion was spent in the year that ended in September, more than twice the amount invested in all of 2016. Activists are increasingly engaging large companies, the research found, and board-related activism has the highest success-rate when the funds deployed have assets of more than $500 million, bringing about some kind of change in 70% of cases. Larger firms, such as Elliott Management and Cevian Capital, are also the most adept at driving the changes they want, according to Deloitte. New York-based Elliott manages $35 billion, while Swedish investment firm Cevian has about $15 billion in assets. The research found that Elliott Management invested the most in the last year, followed by Cevian Capital, ValueAct, Icahn Enterprises, and Third Point. Activists are also looking outside the increasingly saturated American market. Half the stakes activists have taken in the 12 months ending in September are outside the U.S., compared with just 30% in 2014, according to Deloitte. Activists are “here to stay in Europe and Asia,” said Jason Caulfield, head of value creation services at Deloitte.
Clearing the Bar: Shareholder Proposals and Resubmission Thresholds
" Harvard Law School Forum on Corporate Governance and Financial Regulation (12/04/18) Whitehill, Brandon"
The vast majority of shareholder proposals satisfy the current resubmission thresholds of 3%, 6%, and 10%, according to an analysis of a dataset of voted shareholder proposals between 2011 and 2018 at Russell 3000 companies by the Council of Institutional Investors. About 20% of proposals win majority shareholder support on the first attempt, but less than 5% of proposals that fail to win majority support the first time go on to pass in a subsequent attempt. Still, proponents can often successfully engage companies if their proposals win substantial—but less than majority—support, writes Brandon Whitehill, a research analyst at the council. The most common proposal subject matter is governance issues, which also win the highest levels of support. Raising the resubmission thresholds to 5%, 10%, and 15% would roughly double the number of ineligible proposals; a more substantial increase to 6%, 15%, and 30%, as called for in the Financial CHOICE Act, would triple the number; while doubling the current thresholds to 6%, 12%, and 20% would have an impact that falls between these two scenarios. Of the proposals that were eligible under existing rules but would fail to satisfy the increased thresholds, only about one-third were actually resubmitted between 2011 and 2018, and those that were gained two to four percentage points in support on average. Still, raising the resubmission thresholds could exclude anywhere from seven to 38 proposals that went on to win substantially higher support when resubmitted, depending on the scenario.
Quotas Are a Terrible Way to Promote Board Diversity. Companies Should Do This Instead
" CNN (12/04/18) Fiorina, Carly; Peterson, Joel"
According to Carly Fiorina, former chairman and CEO of HP (HPQ), and Joel Peterson, chairman of Jet Blue Airlines (JBLU), boards should become more diverse "because a variety of backgrounds, experiences, and skill sets leads to stronger, more rigorous, and significantly more effective corporate governance. And more effective governance means better performance for all stakeholders." However, they do not think California's one-size-fits-all quota system is the answer and "will inevitably lead to a box-checking approach that will further damage board credibility and performance." Instead, to increase board diversity, they recommend seeking out more angular expertise for the board, rather than having a CEO monopoly on board seats; grilling companies on how they recruit board directors; using blind resumes in the recruitment process; considering different evaluations for the next open director search; and evaluating and implementing team health and performance metrics for the board.
For Companies, It Can Be Hard to Think Long Term
" Wall Street Journal (12/03/18) Stoll, John D."
Short-term versus long-term thinking on Wall Street is a key concern for chief executives attempting to support significant capital investments that can take years to pay off. Long-range strategies can be difficult to execute in an era when Wall Street is focused on three-month reporting periods. "Companies need to make a choice," says Tim Koller, a McKinsey & Co. partner. "Do I please investors who are in it for the long haul, or do I please investors who are playing the quarterly game?" The data behind the issue does little to answer the question. McKinsey says 75% of shareholders are considered long-term investors, meaning they should be more patient than sell-side analysts, and Koller says there isn't a lot of evidence that proves shareholders want executives to focus so heavily on the short term. Still, the number of publicly traded companies is trending down, partly because of the growing pressure on executives to put immediate performance before investing in the future. Many business leaders are weary of feeling forced to make short-term decisions that could negatively affect their companies' long-term health. Barnes & Noble Inc. (BKS) Chairman Leonard Riggio, for example, said in October the bookseller is weighing going private because public shareholders may not be sufficiently patient to support a costly and extensive turnaround plan. Many critics of short-term thinking on Wall Street say quarterly earnings is the area most in need of immediate change. Even if quarterly guidance holds executives accountable and fosters transparency, it may not be worth the detrimental behavior that sometimes results.
Should Dual-Class Shares Be Banned?
" Harvard Business Review (12/03/18) Govindarajan, Vijay; Rajgopal, Shivaram; Srivastava, Anup"
The use of dual-class shares has grown recently, and there have been calls to eliminate them, or at least have a mandatory sunset clause. In this article, Vijay Govindarajan of Dartmouth's Tuck School of Business, Shivaram Rajgopal of Columbia Business School, and Anup Srivastava and Luminita Enache of the University of Calgary argue that an "outright ban on dual-class shares would not be costless. For example, one principal reason for decline in the number of initial public offerings is the increasing reluctance of technology companies to list their stock, which is largely caused by rising shareholder activism. At the margin, a ban on dual-class stock would encourage more technology companies to remain private, or motivate listed technology companies to go private, eliminating common investors' chance to buy even the inferior voting stock. This growing possibility is likely why Hong Kong and Singapore stock exchanges have reversed their earlier stance and allowed dual-class shares." Meanwhile, they believe "a sunset clause would be ideal if there exists a fixed, predetermined time after which all companies become mature enough to need no further changes in their business models. However, we cannot completely endorse this idea for two reasons. First, the firm age at which [a] sunset clause should kick [in] is far from clear...Second, and more important, we are unsure whether any of today's companies can bask in their established business models forever, given the increasing pace of creative destruction and the emerging competition from digital companies." Instead, they recommend a more flexible shareholding structure. "Companies with dual-class structures could be required, after a period of predetermined years, to gain approval from a majority of all shareholders to continue the dual-class structure. Furthermore, single-class firms should be given an option to convert to dual-class shares through a shareholder vote, in order to carry out significant transformations, instead of having to completely delist in order to achieve that goal," they write.
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