IN-DEPTH: Proxy advisers’ support for dissidents slides
This article was first published on Activist Insight Online on Wednesday 11 August, 2021. For more information about the module, click here.
Support from Institutional Shareholder Services (ISS) and Glass Lewis for dissident investors in proxy contests has declined in recent years, as issuers up their game and dedicated activists avoid going to a vote in most instances.
According to data from Proxy Insight Online, ISS backed at least one dissident director in over half of proxy contests between 2016 and 2018. That number fell to 38% in 2019 and, despite a brief rebound in 2020, 30% year-to-date. Glass Lewis’ recommendations for at least one dissident slid from 56% of proxy contests in 2016 to 30% in 2020 and 36% so far this year, with the lowest percentage of 15% reached in 2019.
Proxy advisers have also become less willing to support the full extent of dissident demands. In 2016, ISS backed 30% of dissidents’ full slates and Glass Lewis 21.7%. That support has gradually declined in the following years to 10% in 2021 for both ISS and Glass Lewis.
The data is based on 95 proxy contests from 141 recorded by Proxy Insight Online since 2016. A separate analysis of 118 Glass Lewis recommendations over the same period confirms the trend.
The all-time average for Glass Lewis, which includes 213 proxy contests dating as far back as 2009 is 42% support for at least one dissident. For 200 ISS proxy contests, the all-time average is 51.5%.
Proxy advisers had been facing pressure in response to their influence over shareholder voting decisions, culminating in greater regulation being passed by the Securities and Exchange Commission (SEC) in 2020 that the advisers said threatened to upend their business model. The Biden administration has since signaled that the changes will not be enforced.
The “corporate lobby is wearing down the proxy advisers” and they might be more supportive of companies, an activism adviser who declined to be named told Insightia, although proving that fact is hard.
The change has not been in the advisers’ analytical approaches, at least. “From what we know there has been no change in the ISS analytical framework or their willingness to support activists,” Qin Tuminelli, a senior vice president at Jefferies’ contested situations advisory, has told Insightia. Tuminelli co-founded ISS’ special situations research unit in 2005 along with Chris Young, who now serves as the global head of contested situations at Jefferies.
“Our approach to contests has remained consistent over the past five years,” a spokesperson for Glass Lewis has told Insightia. ISS declined to comment.
If the approach of proxy advisers to assessing contested situations has remained the same, it may be activism that has changed.
Companies are increasingly better prepared for proxy fights and know how to get the support of shareholder advisory firms. “Companies are much more aware of the possibility that they could be a target and are being proactive about it, analyzing themselves, looking in the mirror,” Tom Ball, a proxy solicitor at Alliance Advisors, said in an interview with Insightia.
For instance, corporations often add new directors during the early stages of proxy contests, earning points with ISS and Glass Lewis and putting activists on the back foot.
Genesco added three directors after Legion Partners launched a proxy fight, prompting the activist to shorten its slate from seven to four persons. ISS acknowledged the additions as a positive step and recommended against the activist, while Glass Lewis deemed them reactionary and partially supported the dissident. Legion lost.
Similar moves this proxy season were made by Tessco Technologies in its proxy fight with Robert Barnhill, Rocky Mountain Chocolate Factory in a battle with two activists, and BenefitFocus in a contested situation with Indaba Capital resulting in the activist dropping its bid for board seats.
Yet in the biggest proxy contest this year, Exxon Mobil’s board reshuffling – particularly its first attempt to stave off Engine No. 1’s criticism that its board lacked oil and gas experience in which it added a former executive from a state-owned oil company it had close business links with – failed to convince either proxy adviser that change was unnecessary.
There have also been changes on the activist side. Professional agitators like Starboard Value, Trian Partners, and Elliott Management often negotiate settlements without the need for a proxy fight. As a result, the number of proxy contests that go the distance at U.S.-based companies gradually dropped from 25 in 2016 to 19 in 2020. So far this year, 13 proxy fights went to vote, lower than comparable periods in 2020 and 2016.
And more often than not, proxy fights that go to a vote are between companies and investors who use the activism strategy only occasionally and might not have the same credibility as a dedicated activist.
In 2014, less than a third of all proxy contests that went to vote were launched by occasional activists and concerned shareholders. That number increased to a peak of 67% in 2019, dropping to 58% in 2020, and 38% so far this year, according to data from Activist Insight Online.
“The fights that are going to a vote are the ones where the dissident perhaps does not have the track record, doesn’t have a history, and the company is willing to take a bet they can prevail,” Ball said.