A Feistier European Proxy Season, US Activism Returns
U.S. activists have had a tough proxy season but those elsewhere are starting to get their mojo back.
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Q1 2021 hedge fund letters, conferences and more
Activism Is Back
While activism is certainly back, with almost a dozen proxy contests for board seats held in the U.S. alone this year as of June 16, activists have only been successful in 61% of resolved board representation demands at American companies thus far. On average, that rate has been about 73% over the last seven proxy seasons, dipping below two-thirds just once, in 2017. The total number of board representation campaigns is also well down from its peak, and is likely on course for its third annual decline.
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True, some demands overlap with other strategies – at Extended Stay America and Leaf Group, board contests were contingent on stopping deals that ultimately went through. In some situations, such as First United and Cedar Realty Trust, activists found other ways to win. That only leaves a handful of notable management victories (the two biggest company wins of the season could be considered Tegna and Delek US Holdings) and a question mark over whether activists could have been a bit bolder in nomination season, or were happy to harvest gains from a steadily rising market.
For those that don’t relish fights for fighting’s sake, that could be the right call. Signs of more punchy defense tactics against bigger activists, including Elliott Management at Duke Energy and Starboard Value at Box, coming a year after Starboard’s first full fight in six years, could suggest that it won’t be as easy even for the big names to walk away with seats in the future. On the other hand, in most situations involving activists familiar to this audience, the results have been satisfactory, including plenty of settlements or unilateral board refreshment.
A Feistier Proxy Season
Elsewhere, a feistier proxy season has been more pronounced. In Europe, Asia, and Australia, the absolute number of successful board demand outcomes has exceeded that of the same point in 2020.
Moreover, the ratio of least partially successful to unsuccessful demands is trending above the long-term average in Asia, a welcome development for advocates of activism in countries such as Japan, Singapore, and South Korea. Activists mostly flunked the 2020 proxy season but returned in only slightly more modest numbers this year, and are likely to be buoyed by the revelations at Toshiba. Indeed, Effissimo Capital Management, one of the activists cheated out of a fair crack at the company last year, vowed to keep up the pressure yesterday, even if it did not commit to a second election contest.
The success rate for Australia’s off-season is also above average, while it still has a way to go to catch up in Europe. The number of successful campaigns there would have to double to meet 2019’s total.
Josh Black, Editor-in-Chief, Insightia
Support For Remuneration Proposals Is Increasing
Beneficiaries of the pandemic have experienced a tough ride when attempting to turn increased profits into bumper executive compensation.
Take the video game and multimedia industries, for example. Investor support for remuneration proposals at electronic gaming and multimedia companies has been decreasing year-on-year since 2018, but COVID-19 has accelerated this trend. Average support for remuneration proposals has dropped to 88.9% so far this year, compared to 96% in 2019 and 93.3% in 2020, according to Proxy Insight Online data.
In one particularly acute example, Zynga’s remuneration report won just 47.3% support at the U.S. gaming company’s May 17 annual meeting, despite revenue increasing from $1.3 billion in 2019 to a record-breaking $1.9 billion in 2020.
Aberdeen Standard Investments argued that the use of one-year performance-based measurements in its compensation structure was a cause for “serious concern,” while Norges Bank Investment Management noted that “such significant awards should be viewed under strict scrutiny,” when based on an increase in profits during the pandemic.
Activision CEO’s Compensation Package Unjustified
Activision Blizzard similarly earned $8.1 billion in revenue in 2020, a 25% increase year-on-year, but investors did not consider this sufficient rationale to justify CEO Bobby Kotick’s $154.6 million compensation package.
In a June 7 letter, Change to Win (CtW) Investment Group urged Activision investors to oppose the company’s “say on pay” vote, due to excessive CEO payouts, as well as the company’s ongoing “inadequate response to substantial shareholder opposition.”
CtW’s letter has clearly ruffled the Activision board’s feathers, so much so that the gaming company announced its remuneration vote will be adjourned until Monday, June 21, so the board can make extra efforts to justify its proposed payouts.
More broadly, investors are making it clear that they will not support proposals that are biased toward short-term performance.
BlackRock’s 2021 proxy voting guidelines reflect the importance of looking beyond the short-term impacts of the pandemic, the fund manager noting it will be more likely to support remuneration structures that “facilitate a focus on long-term value creation.”
This has been reflected in BlackRock’s voting this year. The fund manager opposed AT&T’s “say on pay” proposal, as well as the re-election of five compensation committee members, at the media conglomerate’s April 30 annual meeting. In a voting bulletin, BlackRock suggested that the company’s many “successes in 2020, that included HBO/HBO Max subscribers exceeding the target,” were insufficient to justify new WarnerMedia CEO, Jason Kilar, receiving a $48 million multi-year equity award.
BlackRock Concerned About Certain Pay Practices At AT&T
“In the midst of historical performance challenges, we remain concerned about certain pay practices at AT&T,” BlackRock commented. “Outcomes should be aligned with shareholder interests – particularly the generation of sustainable long-term value.”
In a whitepaper published in February, Vanguard similarly said it would not support compensation committees retroactively adjusting performance targets or time horizons to account for increased profits during the pandemic and will look for a strong focus on long-term performance.
Companies that experienced a profit surge as a direct result of the pandemic are under just as much scrutiny to ensure executive payouts are as reasonable as their underperforming peers, and investors expect remuneration structures to align with long-term, sustainable value creation across the board.
Rebecca Sherratt, Corporate Governance Editor, Insightia