October 8, 2018

Activism: TSR Tips the Scales in Proxy Fights?

Here’s an interesting article from investor relations firm ICR that says the outcome of a proxy contest with an activist may turn on a company’s total shareholder return:

The evaluation frameworks used by both ISS and Glass Lewis address multiple dimensions including, but not limited to, a company’s operations, capital allocation, corporate governance, executive compensation and Total Shareholder Return in relation to both its peers and its relevant indices. Of those factors, our analyses reveal that TSR may be the most significant variable in determining the proxy advisors’ vote recommendations.

Since 2013, in 91.4% of contested elections the dissident shareholder has cited poor shareholder return as a reason for change at the board level. Over the same period, ISS has issued a vote recommendation for a dissident slate when the company has outperformed its ISS defined peer group on a backward looking 3-year and 5-year basis less than 3% of the time.

ISS has consistently recommended a partial or full dissident slate when a company has significantly underperformed its ISS defined index and ISS defined peer group. Based on the median values, when ISS has recommended a partial or full dissident slate, the company has dramatically underperformed its ISS defined peers and ISS defined index.

Of course, once you’ve got an activist campaign on your hands, it’s too late to start worrying about your TSR performance. For that reason, the article recommends that boards and management monitor TSR performance and understand how to manage its components as part of their overall framework for assessing the company’s vulnerability to activism.

John Jenkins