Wednesday, September 16, 2009

Activist investors are very likely to like Mary Schapiro

As head of the Securities and Exchange Commission, Mary Schapiro has already taken a bunch of steps to help activist shareholders-- both institutional and hedge funds -- expand their efforts. For one thing, Schapiro finally moved to axe ballot stuffing, after the SEC has waffled on the issue for years. Brokers will no longer be able to cast a vote for management's slate with uninstructed retail shares. That could shift the outcome of "Just Vote No" campaigns against particular directors in the case of some large companies, such as Bank of America, where there is a huge retail vote.

At the same time, the SEC is taking action also after years of inaction to give shareholders more say in corporate board elections. The ever contentious "shareholder access" proposal is expected to be enacted next year, giving shareholders the ability to nominate one or two director candidates to a corporate board on the corporate proxy. This, however, is unlikely to discourage big activists like Carl Icahn from running their own slates. Nevertheless, it could make it easier for labor-backed pension funds to put their candidates up for election.

Congress is quickly moving to enact 'say on pay' legislation that would give investors an ability to have a nonbinding vote on executive compensation-- all that could influence their behind-the-scenes dealmaking ability. Once the economy recovers, expect activist investors to use this leverage to press companies into deals or stock buyback initiatives. The legislation has already passed the House Financial Services Committee. Expect it to be a key part of bank reform legislation that will be approved by early 2010.

Majority voting for directors is also in legislation on Capitol Hill. Majority voting, which already takes place on a company by company basis, would require directors to receive more than 50% of the vote of participating investors. Right now management backed nominees need only one shareholder vote to win-- a director can vote one share they own themselves for themselves and presto! they're back in.

All this is going to make it easier for activist investors to press for their interests. You think the environment is already expanding for shareholder activism? Watch out, with Schapiro and a financial crisis in tow, big changes are coming.

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