Q & A : The Ins and Outs of the Proxy Fight : Q & A: John Wilcox, chairman of a proxy solicitation firm, discusses what some O.C. companies have recently faced.
The era of hostile corporate takeovers may be over, but the proxy fight lives on.
Orange County has seen its share of proxy fights, which can be anything from a battle for the control of a company’s board of directors to a vote on a management proposal to increase executive compensation.
Earlier this year, dissident shareholder Rafi Khan lost a bid to take control of Costa Mesa-based ICN Pharmaceuticals from founder Milan Panic. And just last week, two other local companies--Gateway Communications in Irvine and US Facilities Corp. in Costa Mesa--faced the prospect of proxy fights when shareholder groups threatened to take control of the companies’ boards.
John Wilcox, 51, chairman of New York proxy solicitation firm Georgeson & Co., said such fights are less frequent than in the 1980s, but shareholders are still very involved. And soliciting proxies--the forms used to cast votes in corporate elections--is easier than before, thanks to rule changes made by the U.S. Securities and Exchange Commission in October, 1992.
At any given time, Georgeson has about 650 clients--either company executives who want to stay in control or dissident shareholders who want to change a corporation’s leadership or its management policies.
More frequently, though, companies hire Georgeson--or competitors such as D.F. King & Co., also based in New York--to find out who its shareholders are and why they are buying or selling the company’s stock, Wilcox said.
In a telephone interview last week, Wilcox spoke about proxy fights, how they work and what is involved.
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QUESTION: What distinguishes a proxy fight from a takeover attempt such as a tender offer?
ANSWER: A tender offer differs from a proxy fight in that cash is put down on the table. Cash is king. If you’ve got arguments competing with cash, cash will always win. In a proxy fight, it’s much more like a political campaign. Two sides are presenting arguments and vying for the votes of shareholders at the annual shareholders meeting. Not all proxy fights are for control of a board too. Many deal with how shareholders should vote on management proposals.
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Q: How does a proxy fight usually start and then proceed?
A: There are some variations because of the new proxy rules. Let me explain what has happened with the 1992 proxy rule amendments. Those amendments make it possible for a shareholder to conduct a communications campaign that is unregulated so long as the shareholder is not seeking proxy voting authority on a proxy card of his own.
That has created a hybrid kind of communications campaign that has come to be known as a “just vote ‘no’ campaign.” In fact, it can be used for a lot of other things than getting shareholders to vote “no” on management proposals. It can be used in support of shareholder proposals to pressure management to do certain things.
Under the old rules, any communication that influenced the way somebody voted in an election was regulated. You had to get permission from the SEC and so forth. Under the new rules, things are much more liberal and flexible for the shareholder.
You have to take that into account. Last year, in the 1992-93 proxy season, the most publicized use of this type of campaign was the State of Wisconsin Investment Board’s effort to influence shareholders to withhold their votes from those directors of Paramount Communications who were on the compensation committee. The State of Wisconsin Investment Board argued that the CEO was overpaid given the performance of the company. Therefore, the directors who worked on the committee should have their votes withheld.
That campaign was unsuccessful, but it did achieve a fair amount of publicity. It could not have occurred under the old rules.
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Q: The problem with being regulated was that it slowed things down?
A: It slowed the shareholder down, and there were some costs involved in preparing filings and getting lawyers involved and collecting information for the SEC documents. It was rigid; now it’s more flexible.
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Q: What kinds of costs does a company incur in a proxy fight?
A: Usually, proxy fight costs include lawyers, printing and mailing, proxy solicitors, telephone expenses for calls to shareholders. If there is litigation, then you get open-ended legal costs. There may be advertising and public relations costs as well. . . .
Costs are also influenced by who the shareholders are. Proxy costs have become easier as more stock is held by institutional investors. Then you can go to the largest holder and reach a majority of shares without getting involved in an expensive, broad-based campaign aimed at individual shareholders.
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Q: When were proxy fights most popular?
A: The peak years were 1988 through 1990. These new rules made it much cheaper to wage proxy fights like “just vote ‘no’ ” campaigns that can have a lot of impact, such as draw attention to a company, send a message to management or destabilize it.
For the past 15 years, the way people have invested has changed. In the old days, individual investors went out and bought stock. Now, the money of individuals is being invested through intermediaries that are big investment pools like pension funds and investment funds. These are the institutions.
The activism of the institutions took root in the takeover era of the 1980s. They were passive for many years. But as takeovers increased, so did concern that management was often guilty of not looking after shareholder interests in fighting off the takeovers.
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Q: You do have a sense of the activism level now?
A: The focus on anti-takeover issues and policy questions on governance characterized the early stage of the movement. In 1989, CalPERS, the state public employees retirement fund, wrote to the SEC complaining about the way the proxy rules worked. That started discussion of proxy rule reform that culminated in adoption of amendments on Oct. 15, 1992. They received more than 1,200 letters, more than on any other issue.
Those rules created these changes, allowing shareholders to communicate with each other without regulation. Now the activist movement has moved from policy and takeover issues to performance, compensation and the role of the board of directors.
Now you have a lot of discussion on a company’s financial performance, its business plan and how it deals with problems. Is the compensation for executives excessive? You see a lot of discussion of whether a board is made up primarily of outsiders. How do they determine compensation? How does the board monitor the CEO’s performance? Does the board own stock in the company and therefore have an interest identical with the shareholders? These issues have a lot of room for common ground between management and shareholders.
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Q: Have the new rules changed the outcomes of proxy fights?
A: There haven’t been enough proxy fights to tell yet. One case we were involved with was ICN Pharmaceuticals in its battle with Rafi Khan. If you look at that one, you can see how complicated a proxy fight can become. They’re very company-specific and people-specific. It was about how Milan Panic ran the company and his own political career. It also had to do with the credibility of Khan. That’s true for every battle for control. I don’t think you’ll see very much change in the win-loss record.
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Q: Who wins?
A: We did a study from 1984 to 1990. In 28% of the cases, the challengers won, and the incumbents won 40% of the time. In the other cases, there was a settlement or some unclear result. In 50% of the contests, the challengers won or took control of the company shortly thereafter. In 74%, the challengers made some kind of impact or gain.
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Q: Do you think corporate boards have become more responsible and independent?
A: I think they have become more informed. One development in recent years is the increasing recognition by senior management or the directors that they have the responsibility to manage their ownership base and their stock’s activity in the market, as much as the attention devoted to operations. This is new thinking.
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Q: Do you anticipate more SEC rule changes?
A: There is one chance. The State of Wisconsin Investment Board wrote the SEC in January requesting them to look into how votes are tabulated and the disclosure of information about voting results at shareholder meetings. They asked that voting results be disclosed immediately instead of waiting for the next filing of documents with the SEC. They’re also seeking access to voting records so they can verify the results.
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Q: Are executive pay issues dying down?
A: Not at all. Those are at the top of the list this season. . . . There is a huge debate about whether executives are paid too much in this country.
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Q: You’ve done this for 20 years at Georgeson. What is it about this business you really like?
A: It’s not just the proxy business. What we’re dealing with here are fundamental issues of how power is shared, how businesses are run. During the debate over proxy rule reform, people focused on core issues of corporate governance. There are issues that are at the heart of what we care about in the United States, at the heart of a democratic society. How do we share power and prevent it from being concentrated? Companies are microcosms for society. People care very much about these issues. There is a lot of intellectual stimulation in this business.
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Q: Are outside chairpersons becoming more popular? Carmelo Santoro, an Orange County executive, has taken that role several times recently.
A: Yes. That fits in with the changing function of the board of directors. It’s a hotly discussed topic. I’m the chairman of Georgeson but not the chief executive officer. Our philosophy is that we bring different skills to the company. Some companies have temporary outside chairpersons for some reason or other, like in CEO turnover. General Motors Corp. said it is sometimes appropriate for non-executives to head a board. It is common in the United Kingdom to have a non-executive chairman. There is no right or wrong answer.
