Thursday, September 30, 2010

NYSE Euronext Outlines 10 Core Principles of Corporate Governance

On September 23, 2010, NYSE Euronext's Commission on Corporate Governance released a report identifying 10 fundamental governance principles for investors, issuers, broker-dealers, and other market participants.

The NYSE-sponsored Commission's 10 core principles of strong corporate governance are the following: 
  1. The Board must focus on creating long-term sustainable growth instead of encouraging excessive risk-taking;
  2. Corporate management has a critical role in corporate governance; 
  3. Although NYSE does not limit a board to just one non-independent director, it encourages boards to establish an appropriate representation of independent directors;
  4. Market-based and collaborative governance solutions are preferable to over-reliance on legislation and agency rule-making;
  5. Good corporate governance should be integrated with the company's business strategy and not viewed as simply a compliance obligation;
  6. Shareholders have a responsibility and long-term economic interest to vote their shares in a reasoned and responsible manner, and should engage in a thoughtful dialogue with companies;
  7. Transparency is critical to good governance--while companies should have appropriate disclosure policies and practices, investors should disclose ownership of derivatives or other securities on a timely basis;
  8. Proxy advisory firms serve an important role in the markets, and thus should be held to appropriate standards of transparency and accountability;
  9. The SEC should work with exchanges to ease the burden of proxy voting while encouraging greater participation by individual investors in the proxy voting process; and
  10. The SEC should not only periodically assess the impact of major governance reforms, but should also expand the use of "pilot" programs to help identify any implementation problems before a program is fully rolled out.
NYSE Commission on Corporate Governance's News Report can be found here; its video news release, here; and its full report here.

To view the members of the Commission, click here.

Posted by David Schatz

Wednesday, September 29, 2010

Chevron Shareholder Activist Faces Jail

Antonia Juhasz
We don't usually follow this type of shareholder activism, but the fact that this person is facing jail time for disrupting Chevron's annual meeting during the Q&A session is fascinating.

If you're interested, you can check out Juhasz's book The Tyranny of Oil

Here's the story from MarketWatch
By John Letzing, MarketWatch

As the nation’s second-largest oil company, Chevron Corp. is accustomed to a cavalcade of activists at its annual shareholder meetings.

But Chevron is working with authorities who are prosecuting a particular shareholder activist, who harangued executives at the annual meeting in Houston last May. Antonia Juhasz was removed from the meeting and then arrested outside, after blasting Chevron’s environmental record and starting a derisive chant, according to people at the meeting. The meeting wrapped shortly afterward.

Juhasz has been charged with criminal trespass and disrupting a meeting or procession, and now faces up to six months in jail. She said the charges are an overreaction and doesn’t accept them. Her attorney said they will fight them.

Juhasz’s prosecution may result in an odd instance of a shareholder activist being not just removed, but also arrested and prosecuted for trespass and disruption. It raises questions about the best way for firms to deal with activists who use small amounts of stock to get into annual meetings to make a public statement.

“This is very, very unusual,” says Sanjai Bhagat, a professor at the University of Colorado at Boulder’s Leeds School of Business, when asked if he heard of shareholder activists being faced with jail time for actions at corporate events.

Chevron spokesman Morgan Crinklaw said in a statement that the company is “cooperating fully with the [Harris County, Texas] district attorney’s office as they move forward in their prosecution.”

Juhasz, who runs the energy program at San Francisco-based advocacy group Global Exchange, deferred questions about the shareholder meeting to her attorney, John Parras. Parras said he will argue that Juhasz did not disrupt the meeting, which could have continued after her turn at the microphone during a question-and-answer period. “The larger question is, can shareholders within a corporation use the process to make the corporation better or more responsive to their concerns,” he added.

The incident has led to the hobbling of one of the company’s most vocal critics. Juhasz said she now must limit what she says publicly about the company for fear of hindering her defense.

Chevron’s Crinklaw deferred some questions about the Juhasz case to the district attorney’s office of Harris County, Texas. George Flynn, a spokesman for the office, said the authority to dismiss criminal cases belongs solely to the district attorney’s office, though it “certainly takes the sentiments of the complainants into consideration in making any decision to proceed to trial.” A preliminary court date has been scheduled for Thursday. 

Tuesday, September 28, 2010

Alliance Advisors Enters the Proxy Solicitation Business

Bloomfield, NJ – September 2010 – Alliance Advisors, a proxy management firm founded in 2005, has announced its expansion into the corporate and mutual fund proxy solicitation business. The firm will provide a distinctive brand of services including proxy solicitation, corporate governance consulting, acting as information agent, proxy contests, mutual fund solicitation, asset recovery services and proxy management.

Read the Entire Press Release

Featured Proxy Contest: Barnes & Noble (BKS) v. Yucaipa Companies

Barnes & Noble Announces Preliminary Results of Annual Meeting.    

All three Yucaipa nominees defeated

Yucaipa vows to continue to press for change and calls on Len Riggio to support buyout bids higher than he might make. 
Click here to read Yucaipa's press release.

Since early 2009, Hedge Fund Solutions has been closely following billionaire investor Ronald Burkle, founder of The Yucaipa Companies, and his activist campaign targeting Barnes & Noble (BKS).

The Official Activist Investing Blog will be publishing important documents concerning the proxy fight right up until its conclusion (annual shareholder meeting: September 28, 2010). This information includes shareholder correspondence papers, such as "fight letter" issued in press statements and mailed to shareholders; shareholder presentations filed with the SEC and presented to proxy vote advisory firms; relevant ligation cases; and more.


Proxy Statements:

9/21/10  BKS revises definitive proxy statement (with supplemental info regarding participants)

Fight Letters:

9/21/10  Yucaipa files letter to shareholders (ISS Recommends "For" Yucaipa)
9/16/10  CEO of BKS letter to shareholders (BKS Strategic Plan Objectives)
9/13/10  Yucaipa letter to shareholders ("Enough with the Fiction")
9/9/10    BKS letter to shareholders (highlighting board steps to increase value)
9/1/10    BKS letter to shareholders (The Future of Barnes & Noble is at Stake")
8/30/10  Yucaipa letter to shareholders ("Don't Be Misled By Barnes & Noble")
8/25/10  BKS letter to shareholders ("Protect Your Investment in Barnes & Noble")

Press Releases and Other Communications:
9/27/10 BKS Responds to Yucaipa's Press Release (claims that BKS' special committee members are independent)
9/27/10 Yucaipa Files Press Release (tells BKS shareholders that Leonard Riggio can't be trusted)
9/24/10 Yucaipa Counter-Responds to BKS' Claims (criticizes BKS for "fear mongering")
9/24/10 BKS Responds to Yucaipa's Press Release (calls Yucaipa's press release "misleading")
9/23/10 Yucaipa Sends Letter to BKS Employees (calls on employees to vote against Riggio's wishes)
9/21/10  BKS Files Press Release (update on strategic review process + proxy advisory support + more)
9/21/10  Yucaipa Files Press Release (calls on BKS stockholders to "Unlock Value")
9/20/10  Yucaipa Files Press Release (ISS supports Yucaipa)
9/17/10  BKS additional proxy statement materials (explanation of how to vote by proxy)
9/16/10  Yucaipa clarification for media (general response to media inquiries)
8/31/10  Barnes & Noble Communication to Employees (how to vote with management)


Seeking three board seats on eleven member board; increasing threshold on the poison pill to 30%; forming partnership with technology company; and getting BKS to buy out at least part of its competitor, Borders Group, Inc.



Leonard Riggio (29.8%; voting: 28.2%)
Ronald Burkle (18.8%)
BlackRock Institutional Trust Company (4.0%)
Dimensional Fund Advisors (3.4%)

Legal counsel to BKS on proxy fight: Cravath, Swaine & Moore
Legal counsel to BKS special board committee to review strategic alternatives:  Morris Nichols
Legal counsel to Yucaipa: Bingham McCutchen
Investment banking advisor BKS to review strategic alternatives: Lazard
Proxy solicitor to BKS: Innisfree M&A
Proxy solicitor to Yucaipa: MacKenzie Partners
Public relations advisor to Yucaipa: Sitrick & Company

Posted and updated by David Schatz and Damien Park

Monday, September 13, 2010

The Spotlight on Boards

Marty Lipton, co-founder of the corporate law firm Wachtell, Lipton, Rosen & Katz, published a memo on September 9, 2010 outlining public company board of directors’ roles and responsibilities. Below is a summarized version of this memo:

The Spotlight on Boards
  • Current focus on the performance of corporate boards prompts revisiting what is expected from the board of directors of a major public company – not just the legal rules, but also the aspirational “best practices” that have come to have almost as much influence on board and company behavior.
  • Choose the CEO, monitor his or her performance and have a detailed succession plan in case the CEO becomes unavailable or fails to meet performance expectations.
  • Plan for and deal with crises, specially crises like HP where the tenure of the CEO is in question, BP where there has been a major disaster or J&J and Toyota where hard-earned reputation is threatened by product failure. 
  • Determine executive compensation, achieving the delicate balance of enabling the company to recruit, retain and incentivize the most talented executives, while avoiding media and populist criticism for “excessive” compensation
  • Interview and nominate director candidates, monitor and evaluate the board’s own performance and seek continuous improvement in board performance.
  • Provide business and strategic advice to management and approve the company’s budgets and long-term strategy
  • Determine the company’s risk appetite (financial, safety, reputation, etc.), set state-of-the-art standards for managing risk and monitor the management of those risks. 
  • Monitor the performance of the corporation and evaluate it against the economy as a whole and the performance of peer companies.
  • Set state-of-the-art standards for compliance with legal and regulatory requirements, monitor compliance and respond appropriately to “red flags.”
  • Take center stage whenever there is a proposed transaction that creates a seeming conflict between the best interests of stockholders and those of management, including takeovers.
  • Set the standards of social responsibility of the company, including human rights, and monitor performance and compliance with those standards.
  • Oversee government and community relations.
  • Pay close attention to investor relations and interface with shareholders in appropriate situations.
  • Adopt corporate governance guidelines and committee charters.
To meet these expectations, it will be necessary for major companies to have a sufficient number of directors to staff the requisite standing and special committees; to have directors who have knowledge of, and experience with, the company’s businesses, even though meeting this requirement may result in boards with a greater percentage of directors who are not “independent”; to have directors who are able to devote sufficient time to board and committee meetings, and the preparation for them; to provide regular tutorials by internal and external experts as part of expanded director education; and to maintain a true collegial relationship among and between the company’s senior executives and the members of the board.

- Martin Lipton

Posted by David Schatz

Sunday, September 12, 2010

Research Report on Shareholder Activism Makes SSRN’s Top Ten List

A paper written by Damien J. Park (Managing Partner, Hedge Fund Solutions) and Matteo Tonello (Director, Corporate Governance The Conference Board)  titled, “The Role of the Board in Turbulent Times: Avoiding Shareholder Activism”,  has recently been ranked in Social Science Research Network’s (SSRN) Top Ten download list for the topic “CGN: Boards & Directors”.

The paper provides coverage on the future, causes, and nature of shareholder activism and offers possible strategies that companies can employ to avoid it. Social Science Research Network is an online organization that acts as a clearinghouse for all scholarly research concerning business-related news and more. World-renowned financial economist, Michael Jensen, founded the organization in 1994. He is arguably best known for developing Jensen’s alpha, but has also been active in issues concerning corporate governance. His organization is a powerful resource. We encourage you to visit its site.

To download a copy of “The Role of the Board in Turbulent Times: Avoiding Shareholder Activism”, click here.

How to calculate Jensen's Alpha
Portfolio Return − [Risk Free Rate + Portfolio Beta * (Market Return − Risk Free Rate)] 

\alpha_J = R_i - [R_f + \beta_{iM} \cdot (R_M - R_f)]

BTW- congratulations to Matteo Tonello for being named to the Directorship 100 list of most influential people in corporate governance.

Posted by David Schatz

Wednesday, September 8, 2010

Retail & Restaurant Companies Targeted by Activist Investors

Below is a summary list of activist targets in retail and restaurant companies (updated September 2010).  This information was extracted from Hedge Fund Solutions' quarterly analysis of activist investments - a subscription service with limited circulation to no more than 50 clients in 2010.

Contact us to request a complimentary copy of the complete quarterly activist analysis, examining over 1000 companies.  In the meantime, feel free to subscribe to our FREE weekly activist reports which are distributed every Monday afternoon.

Retail and Restaurant Activist Targets Sept 2010

Posted by David Schatz, Damien Park and Jon Heller

Tuesday, September 7, 2010

GuruFocus Podcast Interview with Jon Heller

Jon Heller, CFA
Geoff Gannon, who now hosts the Investor Questions Podcast for, recently interviewed Jon Heller, a Partner with Hedge Fund Solutions and co-author of the firm's activist investment research products.  Jon is also the guy behind the Cheap Stocks blog.

You can listen to the interview here.

Thursday, September 2, 2010

A Breakdown of Proxy Access

On August 25, 2010, the Securities and Exchange Commission voted 3-2 along party lines to allow proxy access. The new rule is historically significant since the SEC has considered investors’ right to proxy access for over three decades. While ultimately this reform was a victory for shareholder activists, it certainly does not offer a golden ticket for a successful dissident proxy campaign.

The new rule will allow shareholders to nominate directors on corporate proxy materials alongside management’s nominees. With the goal being to encourage long-term investment, the SEC will grant proxy access only to a shareholder – or multiple shareholders – who have owned 3% or more of a given company’s shares continuously for at least the past three years (note: companies under $75M in market cap are exempt for three years). Interestingly, “[s]hareholders will not be eligible to use the rule if they are holding the securities for the purpose of changing control of the company”. Additionally, shareholders eligible to use this new rule may nominate no more than one nominee, or what is 25% of the number of a company’s directors – which ever is greater. Submission of nominees must be prior to 120 days before the anniversary date of last year’s mailing of the company’s proxy statement. Other stipulations include the following: eligible investors will be entitled to include a 500 word supporting statement for their nominee(s), companies may seek a "no action letter" to permit the company to exclude the nominee(s); priority is given to the largest shareholder (or shareholder group) in the instance of multiple shareholders proposing more than 25% of the board; nominees must satisfy the eligibility requirements of federal and state laws, as well as objective independence standards of the national security exchange/association rules applicable to the company; investors cannot borrow shares to meet the 3% threshold, however, investors who lend shares may count it toward the threshold so long as they recall the stock before the election.

In defending itself against a possible lawsuit by the nation’s largest business lobby, The Chamber of Commerce, SEC Chairman Mary L. Schapiro argued that the Dodd-Frank Wall Street Reform and Consumer Protection Act granted the SEC the authority to address the issue of proxy access.

Andrew Shapiro of Lawndale Capital Management, an activist hedge fund investor who invests primarily in micro cap companies, complained that the new rule doesn’t go far enough. He argues that small company boards should not be exempted from the rule since their shareholders, “having already lost corporate governance protections from various other small company exemptions… are most in need of proxy access to offset the more prevalent dysfunction found in small company board’s governance”. Conversely, The Chamber of Commerce and other corporate representatives have complained that labor unions and pension funds would use proxy access to force their will on companies, thus damaging companies’ ability to realize otherwise sound business objectives. The Chamber of Commerce has argued that proxy access grants “special interests the ability to hold the board hostage on narrow issues at the expense of other shareholders” and “[s]pecial-interest politics have no place in the boardroom”. They have pledged to fight the rule tooth-and-nail.

However, without a Court injunction, proxy access will effect companies mailing proxy materials to shareholders as early as March 2011.  The implications are far reaching for both investors who want to use access and corporations who find themselves on the receiving end. This means that companies, Wachtell, Lipton, Rosen & Katz recommend, place a “heightened emphasis on investor relations and [have] more strategic and tactical thought being devoted to corporate governance issues”. Corporate boards will need to hold management to greater accountability than ever before, and focus more on issues like community and labor relations, social responsibility, executive compensation, ethical standards, etc. – which have been the subject of much criticism by labor unions and pension funds. On the other side, shareholders will need to seek “long-term value [in] their investment [in order] to manage the proxy access regime responsibly”.

Posted by David Schatz