7/19/2019

This Year Becomes Year of Improving the Share Price, Reveals Activist Report

IR Magazine (07/19/19) Holt, Andrew

Lazard's Review of Shareholder Activism for the first half of 2019 shows 107 new global shareholder campaigns engaging 99 companies, down 25% from the record in the first half of 2018 but in line with the elevated multi-year trend. Rich Thomas, managing director of European shareholder advisory at Lazard, said, "In 2019 we have seen a pullback in new campaigns but that should not be confused with a reduction in the level of activism. Because 2018 was the year of new ideas with a record number of new campaigns, 2019 has become the year of improving share price performance and generating activist returns. Management and boards can feel that pressure more than ever before." The report reveals that the top 10 activists increased their cumulative capital deployed in public activist positions, new and existing, from $75.5 billion at the end of the first quarter to $82.2 billion at the end of the first half. About 46% of all campaigns in the first half involved the M&A thesis. Thomas said, "The consequence of this increased focus on M&A and strategy is more pressure on management teams and boards to clearly and convincingly communicate their vision for the strategic future of the business." Also in the first half, activists won 81 board seats, 91% of which came from settlements. "Since 2013, approximately 800 board seats have gone to activist nominees," Thomas added. "These new directors are stimulating a changed dynamic in the boardroom, creating an environment that is more challenging and less safe than ever before. With CEO turnover at activist-[engaged] businesses being almost double that of the average company, management teams are feeling pressure to perform. This pressure is coming from an investor base that is much less patient than it was three years ago."

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7/18/2019

Hostile Takeover of PG&E? Billion-Dollar Hedge Funds Duel Over Bankrupt Utility

Sacramento Bee (07/18/19) Kasler, Dale

Two groups of hedge funds are fighting for control of bankrupt California utility PG&E Corp. (PGE), which is facing thousands of lawsuits from wildfire victims. In a July 17 court filing, PG&E's major bondholders said that, as part of a larger reorganization of PG&E, they are seeking to buy 85% of the utility’s stock for $19 billion. PG&E responded in a July 18 court filing that accused the bondholders of trying to seize control of the company "at a significant discount." PG&E is expected to submit its own reorganization proposal in August, which would need the approval of the company's creditors, the bankruptcy judge, and the California Public Utilities Commission. In a commitment letter, the bondholders, who are led by hedge funds including Apollo Global Management, Pimco, and Elliott Management, said they would use the money to settle existing wildfire claims and finance PG&E's required contribution to a new state insurance fund for future wildfire costs. The bondholders' takeover attempt reflects the belief on Wall Street that a well-run PG&E could be extremely profitable. Their plan will likely meet resistance from a group of hedge funds, consisting of Abrams Capital, Knighthead Capital, and Redwood Capital, that own a combined 10% of PG&E's stock. While the bondholders want to pay the old wildfire claims by injecting new capital into the company, PG&E management wants to take on new debt, a move that would benefit them but likely weaken the company. The first test of the bondholders plan comes July 24, when they'll ask Bankruptcy Judge Dennis Montali for permission to circulate their takeover offer among creditors. Typically, PG&E would have the right to submit the initial reorganization plan.

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7/21/2019

Proxy Advisers Sign Up to Tougher Scrutiny

Financial Times (07/21/19) Mooney, Attracta

Five major proxy advisers, including Institutional Shareholder Services and Glass Lewis, have agreed to a series of updated principles and supervision from an independent committee, which has been set up to oversee businesses involved in shareholder voting. These recommendations came from a review led by the Best Practice Principles (BPP) Group for Shareholder Voting Research & Analysis, which was founded in 2013 to glean a better understanding of proxy advisers. The updated principles, which will operate on an "apply and explain" basis, require proxy advisers to disclose the extent to which listed companies have been asked for input on recommendations. The new committee, which will consist of an independent chair and 11 members, will monitor whether companies are applying the updated principles and look at the public reporting of signatories, in addition to managing an open forum. The plans emerge in a period of increased scrutiny for proxy advisers, whose critics have complained that their decision-making lacks transparency and displays conflicts of interest. In June, the second installment of the European Shareholders Rights directive went into force, requiring proxy advisers to disclose information on processes, codes of conduct, and any potential or actual conflicts of interest. Additionally, U.S. regulators, especially the Securities and Exchange Commission (SEC), are circling the sector, prompted in part by criticism from companies. In a joint letter that Nasdaq released in February, several U.S. companies said that "the SEC must take strong action to regulate proxy advisory firms" to uphold American capitalism.

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7/21/2019

CEO Pay Ratio: Leading Indicators of Broader Human Resource Matters?

Harvard Law School Forum on Corporate Governance and Financial Regulation (07/21/19) Kesner, Mike; Tays, Tara; Sim, Ed

Researchers examined the 2019 CEO pay ratio disclosures of 331 S&P 500 companies and saw no company disclose changes to its CEO pay program based on the CEO pay ratio, which, along with other data, suggests that the CEO pay ratio had no material impact on how companies establish CEO compensation. Analysis shows that the change in pay ratio was impacted by an increase or decrease in the compensation of the median employee and the CEO, both in absolute and relative terms. Some 43% of companies used the same median employee from last year, while 9% replaced the median employee with a comparable employee and 48% determined a new median employee. Meanwhile, CEO pay ratio decreased at 46% of companies, of which 12% occurred when both median employee and CEO pay increased, 23% occurred when median pay increased and CEO pay decreased, and 12% occurred when both median and CEO pay decreased. The researchers note that despite its lukewarm impact, CEO pay ratio disclosure may be merely an "opening salvo" in rising demands for additional employee and compensation data. Boards should consider shifting their attention to gender, ethnicity, or racial pay gaps that cannot be properly supported by differences in experience, roles, and responsibilities, individual performance, or other pay-related factors. The researchers point to action on this issue from state legislatures, U.S. companies, presidential candidates, and other countries, as well as a recent report by the Securities and Exchange Commission's Investor Advisory Committee, which called for more corporate disclosure including workforce composition, tenure, training, and other human capital information.

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7/18/2019

U.S. Casinos Unlock the Value in Their Real Estate

Financial Times (07/18/19) Indap, Sujeet

U.S. casino operators increasingly are unlocking the value in their real estate, which is spurring mergers and acquisitions (M&A) across the sector. Specifically, they are splitting off the land on which their giant entertainment complexes sit and taking advantage of investors' hunt for income amid ultra-low interest rates. CreditSights analyst James Goldstein says, "Given the lack of domestic greenfield opportunities, the availability of property finance has facilitated recent sector M&A, a necessity for growth." However, it remains uncertain whether this strategy has made gaming companies themselves an unduly risky proposition for investors, and how they and their associated property companies will perform in an economic downturn. This financial engineering has been pushed to the forefront at Caesars Entertainment (CZR), where commercial mortgage-backed securities have allowed for greater leverage. In June, Caesars was acquired by Eldorado Resorts (ERI) for $11 billion, in part at the urging of investor Carl Icahn, who had amassed a 15% stake. Vici Properties (VICI) agreed that it would simultaneously buy the underlying land and buildings of three additional Caesars casinos for $3.2 billion, providing Eldorado with extra cash to fund the deal. "The Caesars/Eldorado deal represents the continuation of consolidation in the sector and was only made possible by the REIT," said one longtime gaming investor. However, the gaming REIT model is untested in a financial downturn, with Goldstein noting that "it does introduce some risks. Leases reduce the ability for operators to individually address underperforming locations. The absence of owned real estate assets gives operators fewer options in the event of unanticipated financial challenges."

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7/18/2019

Tech Insiders Offer Top Advice on How to Get More Women on Corporate Boards

Fortune (07/18/19) Kowitt, Beth

At Fortune's Brainstorm Tech on July 17, a panel of board directors talked about how to improve board diversity and why it matters. Jeff Richards, managing partner of venture capital firm GGV Capital, says that diverse boards drive diverse managers and companies, but getting portfolio companies to consider fresh talent for board seats can be frustrating. Richards notes that companies will often reject even the most qualified candidates if they have not been on boards before, which leads to missed opportunities for both the company's diversity and its performance. David Trujillo of TPG Capital says his company used to consult big executive search firms to find directors for its portfolio companies, but found that it received the same list of people for every board. In August 2017, TPG laid out the diversity statistics of all 250 of its portfolio companies and began tying compensation to whether partners improved board diversity, spurring TPG portfolio company boards to add 35 women within a year. TPG also compiled a database of 700 potential director candidates, most of whom had never served on a board before, to identify next-generation talent. Several female directors on the panel say they keep a list of strong female board candidates to recommend when they're offered a board position they can't accept. In addition, Hilarie Koplow-McAdams, a venture partner at NEA, says she helps those candidates write their "board narrative" to explain why they would be a good director.

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