Steven Davidoff Solomon, the “Deal Professor,” has written the latest in the most recent installment of the perennial and increasingly shrill attempts to sell a story about how rebel shareholders are becoming less successful in making changes in under-performing companies. You know, a Wall Street version of “The Empire Strikes Back.”
But neither his numbers nor his argument hold up. What he calls a “surprising, fighting turn” is neither. His first point:
According to the proxy-advisory firm Institutional Shareholder Services and data from SharkRepellent, about 32 out of 78 contests will go to a vote in the second quarter of 2015 alone. This compares with 33 out of 92 contests for all of 2014.
But he concedes that most proxies are voted in the second quarter, and he does not even try to extrapolate these numbers through the rest of the year, so it is really not much of an uptick.
Even if we rely on the better (and higher) figures from ISS, as reported by DealLawyers.com, with just over twice as many contests this year as in 2014, that increase may seem impressive, but it is not the relevant number. The relevant number is .75%, as in 3/4 of one percent. Even if we get twice as many proxy contests this year, it is still an infinitesimal percentage of the public companies traded on the major exchanges. And if there is not some shareholder engagement in at least some poorly performing companies, we must conclude that there are too many obstacles to the kind of essential oversight that validates free market capitalism.
Solomon notes that this year some of the usual suspects, particularly Carl Icahn, are staying on the sidelines while some new activists are pushing companies and REITs for change. But this is neither surprising nor evidence of more effective “fighting” on the part of underperforming insiders. He tries to draw conclusions but has to concede that each company, activist, and campaign is different.
What we have learned is that shareholders make sophisticated and informed judgments about activist initiatives, of which contests for control are just one category. The unprecedented support for proxy access proposals this year, for example, show that investors want structural changes to ensure greater board independence. Solomon gives corporate insiders credit for developing “more nuanced” strategies for dealing with governance issues. He makes a big mistake by not crediting shareholders with the same evolution.