KUHN CAPITAL Wednesday, March 21, 2018
Dispatches from the front

In Defense of Bad Management

Good news for shareholders: a large survey of public firms finds that the proliferation of some anti-takeover defenses appears to be slowing, with a few of the most potent tactics even in decline.

The survey of nearly 2,000 public firms was recently completed by Institutional Shareholders Services.

The usual defenses are blank-check preferred stock, advance notice requirements, golden parachutes, staggered board terms, and poison pills. Most such defenses have one thing in common: a desire by the target’s management and board to avoid losing their lucrative jobs in the event an unfriendly suitor succeeds in gaining control. Of course, in protecting their jobs, management often denies owners the right to maximize the value of their holdings.

Poison pills are usually the issuance of preferred stock redeemable at a ruinously high price should the deal close. Two years ago, pills were in place at 55% of companies surveyed: now 51% use them. Still, when put to a vote, the majority of shareholders prefers pills to be abandoned altogether.

Similarly, the use of staggered elections for directors, which makes the job of replacing recalcitrant board members much more difficult, has declined, down from nearly 60% to about 56% of the companies responding. However, when shareholders are allowed to vote on the subject, 63% of them want to dismantle staggered terms.

Unfortunately, certain defense tactics are on the rise. Advance notice requirements (where shareholders must seek the advance permission of management before presenting director nominations or other motions from the floor) are used today by about 81% of firms surveyed, up from 73% two years ago. Back in 1995, only 44% of these companies required notice.

Golden parachutes -- sometimes called “pay for failure” by shareholders activists -- are fat executive compensation packages triggered by a change in control. Their use has also risen, in this case from about 73% to nearly 78% of companies surveyed, partly because shareholder approval of them is not required.

Despite the mixed picture, the overall trend seems to indicate that institutional investors like hedge funds are beginning to loosen the death grip of underperforming management on shareholder wealth. To the owners go the proceeds!

Ryan Kuhn

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