Money Managers Face Conflict on Takeover Defenses

Casting shareholder votes on corporate issues wasn’t very important several years ago when Greta Marshall was a manager of the pension fund stock portfolio for Deere & Co., the farm equipment maker. She let her secretary do it.

Things have changed in the last few years. Marshall is now investment director for one of the biggest institutional shareholders in the country, the California Public Employees Retirement System, whose board carefully debates proxy votes on corporate issues before any are cast.

At Deere, the matter is no longer left to secretaries but rather to an in-house committee of executives. For proxy votes, once considered so mundane that many professionals did not even bother to cast them (few individual stockholders cast them even today), are no longer limited to ratifying slates of directors already handpicked by management and approving traditional contracts with outside auditing firms.

Now they are just as likely to involve sweeping takeover defenses with tangible effects on the rights and portfolio values of stockholders such as pension funds.

The proliferation of corporate restructurings on proxy ballots has underscored the conflicts faced by institutional investors as never before. In interviews, dozens of institutional money managers acknowledged feeling some pressure to support takeover defenses that could seriously dilute their rights as shareholders or diminish the value of their stock holdings. While some of the pressure is self-imposed, as money managers react to the presumed consequences of voting otherwise, some comes directly from corporate executives and board members. None would cite specific cases.

Institutional investors are often tied to major corporations with relationships outside the simple one of stockholder. Insurance companies sell corporations policies. Banks seek lucrative lending relationships. And outside investment advisers seek to add new clients and to keep old ones.

“You own shares in a company that’s also a client who pays you a fee,” says Robert Kirby, head of Los Angeles-based Capital Group, an independent investment adviser. “That’s as basic a conflict as you can get.”

Where pension funds are managed by a corporation’s own employees, those employees often must vote on takeover defenses that their own superiors consider indispensable.

“In the private sector, executives get pressure from their counterparts at other companies, and it is explicit,” says Marshall. “The subtle pressures come from the fact that you’re employed by people who express a definite preference for the management point of view. There are only so many stands you can take that are diametrically opposed to management and have much of a career left.”

Independent money managers, who compete ferociously for the job of “running money” for corporate and public pension funds, also must keep a low profile on corporate-interest votes, lest they displease existing or potential clients.

Managers of state and municipal pension plans are exempt from the corporate pressures that squeeze private fund managers. But some say political conflicts can be even worse.

New Jersey’s investment director, Roland Machold, supervisor of a $12-billion state retirement plan, recalls how his vote was courted while Curtiss-Wright Corp., a New Jersey company in which the state fund had about a 2% holding, was trying to fend off a takeover by Kennecott Copper. (The battle lasted from 1977 to 1981.)

Political Pressures

“Curtiss-Wright contacted every politician in the state,” he says. “We got called by the governor’s office. The Curtiss-Wright chairman called me. . . . But we had done a complete financial analysis, and we supported Kennecott.”

The role of institutional investment managers in proxy votes is of key significance today because institutional money dominates the stock market.

More than 50% of the stock of corporations listed on the New York Stock Exchange is owned by the insurance companies, banks and pension funds that make up the institutional universe.

As professional investors, institutions are more likely than other stockholders to have the resources to cast an informed vote.

At the same time, no longer can a typical institution resort to the traditional way that stockholders express discontent with a company: the “Wall Street rule” of voting with one’s feet by simply dumping the company’s stock. Many institutional holdings are so large that their blocks in any given company cannot be easily sold without depressing the stock price.

“Instead, institutions have got to think whether they should vote for or against” managements, says W. Gordon Binns, manager of the $25-billion pension fund of General Motors.

Investor-relations specialists say evidence of corporate executives applying direct pressure to obtain favorable institutional votes is hard to come by. As Ida Tarbell wrote in 1904 of Rockefeller’s Standard Oil Trust: “You could argue its existence from its effects, but you could never prove it.”

Measures Usually Pass

“Many companies have 50% or higher institutional ownership, but almost all anti-takeover proposals pass, perhaps with 25% opposition,” says James E. Heard, director of the corporate governance service of the Investors Responsibility Research Center, a Washington-based research group. “It doesn’t take a genius to see there are a lot of institutions supporting anti-takeover resolutions.”

Brunswick Corp., for example, managed to pass proposals limiting shareholder voting rights and staggering the terms of directors--both of which sharply discourage hostile takeovers and might consequently diminish share values--by a nearly 60% margin despite institutional ownership of 53%.

J. C. Penney, with 54% institutional ownership, passed similar provisions with only 23% of shares voted against and 4.3% abstaining. Rockwell International eliminated its stockholders’ right to change bylaws by a mail ballot without a board meeting and passed other restrictive proposals, with 73.4% share approval, despite institutional ownership of 48%. There are scores of other examples.

Evidence Ambiguous

Still, evidence of direct pressure on institutional managers to vote a management line is anecdotal and ambiguous.

At the Department of Labor, which has jurisdiction over the activities of private pension plans, David Walker, deputy assistant secretary of labor, says he is “not aware of any cases we’ve brought for improper pressure” by management on institutional money managers.

The agency did plan to bring one complaint, however, where it sensed institutional pressure on the employee-beneficiaries of a pension plan. That was in connection with the ultimately unsuccessful 1984 offer for Carter Hawley Hale Stores, the Los Angeles department store chain, by the Limited, a Columbus, Ohio, retailer.

Carter Hawley Hale’s employee retirement funds held more than 18% of its stock, a potentially decisive bloc in any proxy contest. Instead of voting the shares itself, the plans’ trustee, Bank of America, passed the responsibility on to the individual employees themselves--a group that could be counted on either to not vote at all or to cast its lot with existing management.

But the bank notified them that it could not guarantee the confidentiality of their vote from management inquiries.

“That was a pretty unsubtle form of pressure,” one Labor Department investigator said.

Almost Sparked Suit

Labor Department sources said at the time that the agency was close to filing a suit to oust the bank from its trusteeship. But it later reconsidered its plans under pressure from the Justice Department. The matter was later dropped entirely.

One Carter Hawley employee and shareholder, however, did sue to remove the bank on grounds that its lending relationship with the department store chain placed it in a conflict of interest. A federal judge in Los Angeles rejected the contention and refused to oust the bank.

Corporate executives acknowledge discussing with institutions impending anti-takeover proposals, particularly when they consider the vote a close call, but most place the contacts in the category of jawboning and say they carefully avoid applying even the appearance of undue pressure.

Federal securities laws generally forbid corporate officers to discuss proxy matters beyond what is written into proxy statements and cleared by the Securities and Exchange Commission.

For their part, pension fund managers are required by federal labor law to manage investments solely on behalf of pension beneficiaries, including employees and retirees, and not to promote their own welfare.

At Times Mirror Co., publisher of The Times, executives undertook a major campaign to contact institutional investors in connection with the company’s recent package of anti-takeover provisions.

Mark Schwanbeck, the company’s investor relations officer, says the company’s legal staff instructed executives “to say only that the nature of the call was to provide information, ask if they had read the proxy materials and to give management’s view.”

Negative Effect

Most institutional managers say they cast such votes on a case-by-case basis. Still, most effective anti-takeover “shark repellents” appear to have a negative effect on stock prices.

Recent surveys by the SEC indicate that super-majority requirements--those mandating stockholder votes of well over 50% to approve takeovers not approved by the directors (the usual definition of a “hostile” takeover)--push stock prices of companies that implement them 3% to 5% below what they otherwise would have been.

The SEC’s chief economist, Gregg Jarrell, says he considers that impact to be significant.

As shark repellents have become more prevalent on corporate proxies over the last two or three years, professional investors say, institutions have appeared to stiffen their resistance, perhaps because the measures have been proposed by companies that had no rational fears of hostile takeovers.

“It’s fair to say that gradually institutional investors have gotten a little steel in their spines,” says Dave H. Williams, chairman of Alliance Capital Management in New York, which manages $23 billion in corporate and public funds. “Anti-takeover provisions were never issues until a few years ago, so it’s safe to say that institutional investors were asleep.”

Shareholder-rights activists say they detect a modest swing in opinion toward opposition to overly restrictive management measures. “The institutions have been voting with us on issue after issue,” says New York’s Lewis D. Gilbert, a longtime agitator on behalf of shareholder rights.

Losing the Battle

Still, even Gilbert’s support falls far below the levels needed to repeal most such provisions. At this year’s annual stockholders meeting of United Technologies, Gilbert’s proposal to repeal super-majority requirements in the company’s bylaws got the support of 23% of shares.

That’s a remarkable vote for a shareholder resolution but far below the 80% vote needed for repeal. “You lose a battle and you win the war,” Gilbert remarks hopefully.

Some companies have even abandoned anti-takeover proposals after concluding that their institutional holders would object.

Whittaker Corp., the Los Angeles conglomerate, on May 2 canceled a stockholder vote on several such measures, including super-majority rules and staggered terms for directors, after concluding that its institutions would vote them down. The company scheduled another vote for June on the less divisive issue of reincorporating in Delaware.

But Heard of the IRRC says his group has detected some “backsliding” in the last year by institutions that once claimed to be firmly against shark repellents.

Moreover, proxy experts say that only two institutional investment advisers can be counted on without fail to vote against anti-takeover resolutions. One is the $37.5-billion College Retirement Equities Fund, the largest tax-exempt institution in the country.

As the manager of billions of dollars in pension money for independent colleges and universities, CREF enjoys unique freedom from corporate or political pressure.

The other, however, is in the mainstream of the corporate world. It is Batterymarch Financial Management, which runs $12.5 billion in corporate and public money. Batterymarch’s manager, Dean LeBaron, is perhaps the most vocal opponent of anti-takeover measures.

“Batterymarch votes against all such measures, and we abstain from the election of directors who put them through,” he says. Batterymarch also publicizes its intended votes 10 days ahead of time. “This makes our clients unhappy with us,” he says.

The prospect of unhappy clients makes most institutional managers simply lay low when the question of anti-takeover resolutions comes around. “I can’t think of any that’s gotten a client because of his stand on stockholder rights,” says Robert A. G. Monks, formerly the Labor Department’s chief pension fund regulator.

Buck-Passing Game

Adds Robert Kirby: “Most institutional money is in corporate pension funds, and the easiest thing is not to rock the boat.”

Corporations and their independent managers have long been able to circumvent these issues with an extended game of passing the buck.

Corporate pension plans often delegate proxy voting authority to their outside advisers. But few have made a real effort to determine how that adviser is casting important votes.

This is partially because shareholder votes, with the exception of those on such social issues as commercial involvement in South Africa, have traditionally inspired nothing so much as boredom. Only recently have questions of corporate governance even appeared on stockholders’ ballots.

“If you went back five or 10 years ago, these issues did not exist,” says Binns, the GM pension fund manager.

Another reason is that no one was forcing pension fiduciaries to vote on proxy matters at all. That may soon change, as the Labor Department says it may soon propose rules requiring such votes--and setting forth the standards by which they must be considered.

The federal agency is considering a proposal by Heard’s organization requiring plan sponsors--the corporations that establish pension plans--to publicly disclose their policies on proxy issues.

Although the agency may not go so far, “our feeling is that, given the importance of these votes, the (pension) plans should at least have documented guidelines for their investment managers and should certainly mandate that the shares be voted,” says Walker, the assistant labor secretary.

A strong enforcement effort might even relieve investment managers of their sense of being boxed in by conflicts of interest. For the Labor Department, there is little question of how a plan should vote in a takeover battle when a company’s interest is at odds with the plan beneficiaries’.

Not Permitted

Under federal law, Walker says, the adviser is not permitted to consider a takeover’s impact on anything but the plan’s ability to provide retirement benefits for its beneficiaries.

That means that if he holds stock for company employees who might lose their jobs if a takeover were completed--but whose stock might rise in value to what is considered a fair price--his responsibility is clear.

“He must consider only the economic impact on the pension plan’s investment,” Walker says, “not on the beneficiary as an employee or a member of the community or anything else. That doesn’t mean people should always vote against management, but they should not vote blindly with management.”