Beware a Proxy Advisor’s M&A and Proxy Contest Advice
Shareholder voting on proxy contests and mergers & acquisitions (“M&A”) are of critical importance to investors. In these types of votes shareholders are being asked to participate, alongside the board of directors, in corporate decision making at the highest level and therefore require shareholders to be just as informed as the board. However, shareholders, including institutional investors who control approximately 80% of all public company voting in the U.S., usually do not have the time, information, resources, or the skills to make an informed vote. That is why they rely on proxy advisors, such as Institutional Shareholder Services (“ISS”), to provide them with voting recommendations.
To provide voting recommendations on proxy contests and M&A, the ISS has created a Special Situations Research Team (“Research Team”). Remarkably, the Research Team has only eight analysts providing voting recommendations on these matters. It is just not possible for these eight analysts, no matter how bright and enthusiastic, to provide voting recommendations that are informed and sufficiently precise. Here is why.
In 2018, there were approximately 51 reported proxy contests in the U.S. This number does not include any foreign proxy contests that the Research Team may have been asked to opine on. When it comes to evaluating how to vote in any one proxy contest, I would think it would take a heck of a lot of resources to become properly informed. This is because your vote will determine whether there is going to be a significant change in business strategy or if the company should be preparing itself for sale. Informed voting on these types of decisions requires a lot of industry and company specific expertise. Most likely, acquiring such expertise entails years of experience analyzing not just a specific industry but also the fine points of the specific company being targeted. Such expertise would require being at the level of a seasoned equity analyst who has both industry and company specific expertise.
The expertise required for any particular proxy contest under review would be extremely hard to find among the Research Team analysts. There are close to 4,000 public companies in the US alone, and they exist in a myriad of industries. For example, the Global Industry Classification Standard includes 11 sectors which can be further delineated to 24 industry groups, 69 industries and 158 sub-industries. In sum, given there is only eight analysts on the Research Team, it would be a rare occasion when the Research Team would be able to find an analyst on staff who would have the expertise to do an adequate job in evaluating a proxy contest.
The same lack of expertise would apply to the generating of voting recommendations on M&A. Moreover, the workload is much greater. On average approximately 5% of U.S. public companies per year delist as a result of M&A activity. This percentage can vary, but let’s assume that the Research Team is faced with around 150 to 300 M&A per year. This number is several multiples greater than what the Research Team must deal with in terms of proxy contests. For a team of eight without the proper expertise, this is an impossible task.
If proxy advisors such as ISS are to provide informed and precise voting recommendations on proxy contests and M&A, then they must invest vastly greater resources into generating their voting recommendations. This means either hiring the hundreds of seasoned equity analysts required to cover the broad swath of industries and companies that may be the subject of such transactions or spending the large sums of money required in obtaining outside recommendations from seasoned professions with both industry and company specific expertise.