IN-DEPTH: Boardroom activism and its different forms
This article was first published on Insightia’s Activism module. For more information about the product, click here.
Activism from within the boardroom has seen a spike this year, putting more companies through an experience that can both replicate and diverge from the experience of a proxy fight with a traditional activist hedge fund.
Such campaigns are sporadic and idiosyncratic, with the DNA of each campaign differing slightly. But industry experts confirm there has been more in recent history.
“We’ve noticed this year, or just even trickling into the last part of 2021 that there’s been a couple more proxy fights that were initiated by directors,” Dexter John, Morrow Sodali Canada CEO, told Insightia in an interview.
Usually, cases where directors take on a proxy fight is either “a founding family type situation or where you have a well-capitalized activist who’s gotten on the board through a previous fight or settlement and has the resources to do something additional,” Paul Schulman, Morrow Sodali Managing Director, told Insightia.
Two members of Lifeway Foods’ founding Smolyansky family are trying to oust CEO Julie Smolyansky from the board. Edward Smolyansky and his mother Ludmila have nominated themselves as part of a five-person slate for the upcoming annual meeting. The brawl began when the company terminated Ludmila’s consulting agreement and announced that Edward was no longer an employee. Lifeway’s independent directors, which make up four of the seven-person board, said they “fully” support Julie, in a March statement.
Last year, another spat between a founding family played out in public at Canadian company Rogers Communications. Edward Rogers went up against his mother in a tussle for five board seats and a disagreement on who should be CEO. In November, Edward won the board fight and had his choice of CEO appointed after a court case.
Also in 2021, NextGen Healthcare Founder Sheldon Razin ran a proxy contest for five board seats and his own, saying he was unconvinced by the company’s performance. Despite the dissident’s collective ownership of 15% in NextGen’s shares they were defeated at the shareholder vote. Management’s full slate was elected and highlights the unpredictability of kicking off a proxy fight even as an insider with a substantial amount of share capital.
Aerojet Rocketdyne, on the other hand, is locked in a proxy fight with its executive chairman Warren Lichtenstein, who has a decades long history of activism. In February, Lichtenstein initiated a proxy contest through his investment firm Steel Partners Holdings, which owns 5.5% of Aerojet shares, for eight board seats, including his own and those of three other incumbents.
Lichtenstein said he started the board conflict after repeatedly urging CEO Eileen Drake to prepare for a collapse of the company’s $4.4 billion sale to Lockheed Martin, calls he alleges fell on “deaf ears.” Lockheed Martin walked away from the deal after the U.S. Federal Trade Commission sued to block the transaction, claiming it would hurt competition in the defense sector.
Drake, who has three board allies in the proxy fight and is nominating a full slate, accused Lichtenstein of “denigrating” the company’s management during efforts to close the sale to Lockheed Martin.
As well as a special meeting to vote on the rival slates, the campaign has spiraled into a lawsuit that Lichtenstein hopes will prove “that Drake and her allies misappropriated and unlawfully used corporate resources,” adding that the lawsuit will unearth “material details about these misdeeds.”
Egos and deep pockets
One thing that is for sure is that if a director is going to be a dissident and run against a board, “you gotta be prepared to spend some money,” Schulman said in an interview. Running a proxy contest “is not an inexpensive prospect,” Schulman says, suggesting directors who do go public are typically well-resourced or have a big investment at stake.
The other ingredient is often an irresolvable disagreement – or bad blood. Issues that become public have already been discussed privately if it is involving a director, John added. But “if a director feels disrespected or slighted then it becomes a public campaign. A lot of the time we are dealing with egos. Egos and deep pockets,” said John.
Despite the uptick this year, both John and Schulman were hesitant to confirm whether the rise of activism within the boardroom was a sustainable trend.
“I don’t know if that’s going to be steady just because of the fact that these things aren’t cheap, they’re expensive,” John told Insightia. “And unless you are self-made and have a good chunk of the shares, you could be swimming somewhat uphill. If it’s a reactionary event, it usually doesn’t end well.”