Stand Up and Take It Like a Man

There’s been a bit of a kerfuffle lately about virtual, online annual shareholders meetings. It seems that Symantic Corporation recently held an audio only, virtual meeting where they took only two questions from shareholders. This angered a number of shareholders and Symantic came out of the process looking as if they lacked transparency, rather than looking as if they are on the cutting edge of technology. Gretchen Morgenson, the financial columnist for The New York Times, did a good job summarizing the meeting and the anger it engendered in its shareholders in her column on September 25^th.

The issue however, is not the efficacy of online annual meetings. There are some obvious efficiency and cost savings benefits to be realized by enabling people to link electronically rather than forcing everyone to come to a single physical location. With today’s technology there are ways that will enable shareholders to actively ask questions and see management’s responses in real time. In other words, companies can structure transparent online annual meetings if they want to; it’s just that many of them are less concerned with transparency than they are with controlling the agenda and message.

To be fair, corporations have reason to be concerned about controlling the agenda. Many special interest groups, if given the chance, would monopolize the question and answer sessions of annual meetings in order to promote their own agendas. In order to combat this, corporations put in place all sorts of limitations and devices to filter out dissenting voices, from the requirement to submit questions beforehand, to time limits, to limits on the number of questions, to arbitrarily cutting off questioners. The result is that usually management ends up looking arbitrary and controlling rather than open to the owners of the company. And when the controlling is done remotely and electronically it looks even worse that it does in person.

So the issue to me is not whether shareholder meetings occur virtually, in person or a combination of the two: the issue is how does management treat the shareholders, even if they don’t like the shareholders’ point of view. For this I take a page from Cork Walgreen, the former CEO of Walgreens.

One of my duties when I was working at Walgreens was to organize the Annual Shareholders Meeting. Attendance at the meeting during the time I ran it grew from around 400 people to over 3,000, and as you can imagine, the number and type of people attending ranged from retirees and employees to sophisticated investors and special interest groups. Questions at the meetings from shareholders at the meeting could be anything and often ranged from complaints about stores being out of merchandise to expansion plans in the State of Alaska to the use of non-union labor in certain construction sites.

The interesting thing about all of these questions was how Cork Walgreen handled them. First, let me say that public speaking was not one of Mr. Walgreen’s favorite things. In fact, he disliked it intensely and rarely appeared in public. But when it came to the annual meeting, he stood up there and took all the questions that time permitted. His attitude was that the shareholders paid him to be in charge and that included answering questions at the shareholders meeting, in good times and bad, no matter how uncomfortable that may have been. He may not have given everybody the answers they wanted – in a forum like the annual meeting you can’t please everyone – but he always gave them the courtesy of listening and responding to their questions. And the shareholders respected him for it.

So the takeaway from all of this is that when you’re conducting your next annual meeting, be it virtual, in person or a combination of the two, take the time to listen to and respond honestly to the shareholders’ questions. In short, “Stand up and take it like a man”. The pain may be intense, but it’s brief. And no one will write stories about how rude you were to shareholders in The New York Times the next day.

What Motivates Your Analyst?

The United States Court of Appeals for the Second Circuit once characterized the exchange of information between corporations and investment analysts as “a fencing match conducted on a tightrope”. If investor relations officers are going to be successful in such a treacherous environment, it helps to understand the analyst on the other side of the conversation and what motivates them. Different analysts have different approaches, and early on in this blog I wrote about “information vampires” (March 2007), “elephant hunters” (April 2007), and “channel checkers” (July 2007) as prime examples of the way some analysts approach things. Now comes a New York Times article published on September 12, 2010, entitled “The Loneliest Analyst” about Richard Bove, a banking analyst that offers some good insights about the way another type of analyst works.

The bulk of the article concerns the lawsuit brought by BankAtlantic, a Florida bank, against Bove for a report he issued about the banking industry in 2008, which ranked the bank’s holding company as among the most risky financial institutions based on financial ratios. The lawsuit was eventually settled without liability to Bove, but it left him the poorer by $800,000 in legal fees. While the drama surrounding the lawsuit is interesting to anyone who has ever listened to a CEO fume about what he thinks is unfair or inaccurate in an analyst’s report, the more interesting part of the article occurs when Bove speaks about his work.

The lead in the article talks about how Bove likes to take “extreme positions” which can occasionally move the markets, gaining him prestige and notoriety. It then cites as an example a recent opinion issued by Bove that government rules would curb mortgage profits and by implication, bank profits. When the share price of Wells Fargo, a large mortgage lender, begin to drop following the report, Mr. Bove’s phone lights up with calls and he states, “That’s what makes the game fun, right?”

According to the article, Bove’s work tends to focus on the big picture, because, as he puts it, “What’s the reason to pay me to be the 14^th guy to tell you what is going to happen in the second quarter at Citigroup? There’s just no utility for a guy at a boutique that operates pretty much on his own to replicate the work of other analysts.”

So one of the takeaways from the article come from learning that analysts at boutique firms may have an entirely different motivation in how they approach research. Without the resources of some of the bigger shops, their focus may be on hitting the home run as opposed to maintenance research, or on big picture, macro stories. Understanding if the analyst you are speaking with takes a differentiated approach will help you as an investor relations officer have a more meaningful discussion with that analyst.

In another interesting portion of the article, Andy Kessler, a former Wall Street analyst, is quoted as saying that it’s common for analysts to change their opinion styles in order to cater to their clients: “If your clients are mostly hedge funds, you’re going to give mostly short-term analysis”. Given that a large percentage of trading volume these days comes from hedge funds, it’s no wonder that we get mostly short-term analysis.

So two quick takeaways from the article: understand what motivates the analyst, and know who his clients are will help you understand his research approach. Sounds a lot like the old broker rule of “Know your client”, but this time reversed.

Proxy Access - Who Benefits?

There is a famous Latin saying, “Cui bono?” that was used in Roman trials to help determine the underlying truth of a matter. The phrase translates into “To whose benefit?” and is meant to suggest the possibility of a hidden motive or that the party responsible may not be who it appears to be at first. And so it is with proxy access, recently adopted by the Securities and Exchange Commission.

The thinking behind proxy access appears pure at first – to promote shareholder democracy by letting shareholders utilize the corporate proxy statement rather than go through the expense of mounting a proxy campaign of their own. But over the years, I’ve come to be suspicious of anything that drapes itself in motherhood and apple pie, whether it comes from the right or left side of the political spectrum, and so I started to think about who really benefits from proxy access.

As I understand the new rule, shareholders who have held at least 3% of a company’s stock for at least 3 years will be able to nominate up to 25% of a company’s board of directors using the company’s own proxy statement. So I guess this is a move to open up corporate boards to shareholders, but I wonder, which shareholders?

Retail? Certainly not retail shareholders; for the most part they don’t reach the 3% threshold.

Hedge Funds? Unlikely, as the turnover in their portfolios means that it is doubtful they will hold stock for 3 years.

What about activist investors – might this new rule inure to their benefit? Possibly, but not to a large extent. A paper entitled “Hedge Fund Activism, Corporate Governance and Firm Performance” suggests that the median holding period for activist hedge funds is 556 days, or 18.5 months. While this might be longer than you thought, it is still only half the time required by the new rule.

Mutual Funds? I suppose mutual funds might be a beneficiary of the new rule, but I’ve never known them to take an interest in nominating directors.

So who’s left? What entities have the financial muscle to hold 3% of a company’s stock for 3 years? What entities have exhibited a desire to use the proxy system to agitate for their own agendas? The answer is: Foundations and Pension Plans. Of these the bulk of the money is represented by pension plans. Add to that the fact that, according to The Wall Street Journal, four out of five for profit corporations have moved away from pension plans, while unionized employees both in the private sector and government, have fought to retain their fixed benefit pensions and the picture of who benefits starts to become clearer.

Least you were in doubt on the issue, consider also that the SEC adopted the rule in a party line vote, 3 democrats for and 2 republicans against. Suffice it to say that republicans don’t get many campaign contributions (or votes) from union members. Finally, consider two of SEC Chairwoman Shapiro’s key appointments to the Commission staff: senior advisor Kayla Gillian, former general counsel at Calpers, the California state workers pension fund, and Richard Ferlauto, former pension director at AFSCME, the union representing state and local government employees nationwide to the investor advocacy office.

Add it all up and it becomes clear that who benefits under the guise of shareholder democracy for all is really a limited number of unions. Now instead of spending union member’s dues in proxy contests they can lay that cost off on the corporations. It’s a nice deal if you can get it.