Just as we are observing the power of the Internet in the current presidential primaries, Corporate America is about to experience a wake-up call regarding the same phenomenon. But in the corporate context, the campaigners are largely activist investors who will use the various Internet and social networking tools to win their proxy battles.
This begs the question of whether Corporate America is prepared to deal with the Internet medium in a proxy contest. I believe the answer is largely “no.”
What we have is a communication medium that has its roots in the younger generation, considerably below the age of those in corporate leadership positions. More than 40 years ago, communications theorist Marshall McLuhan famously stated, “The medium is the message.” He meant that the culture formed around the medium becomes the message. In the political arena, we’re witnessing that through the flocks of young people becoming politically involved for the first time and the staggering amounts of money being raised online. In the business arena, we’re seeing it through the flocks of investors laying siege to companies they dislike.
Yahoo got a taste of this last year when shareholder activist Eric Jackson, chief executive of Jackson Leadership Systems, used his blog and YouTube videos to garner the support of some 100 shareholders with a combined $60 million stake in Yahoo. Together they waged a campaign that resulted in a 33 percent “against” vote for seven of the 10 directors and the ouster of CEO Terry Semel. The irony of it all: Yahoo is one of the biggest purveyors of the online shareholder forums activists like Jackson are using to communicate and coordinate their proxy strategies.
Yahoo may be the tip of the iceberg. Patrick McGurn, special counsel to ISS Governance Services, recently predicted that there would be a substantial increase in investor activists using the Internet. So, what are companies doing to deal with this? Part of the answer may be found in the corporate experience with adoption of the Securities and Exchange Commission’s new notice and access rule. In a January 24, 2008, release, a National Investor Relations Institute survey showed a slight majority of respondents (54 percent) said they would be adopting the new rule. The primary motivating factor in adopting e-proxy is the anticipated cost savings resulting from reduced proxy material print runs. And what is the other 46 percent doing? They’re waiting to see what the early adopters experienced.
Adopting a similar wait-and-see attitude toward what may be forthcoming from activist investors might be a bad idea. Indeed, it could well leave companies behind the power curve and playing catch-up for several years. Columbia University Law Professor Jeffrey Gordon writes in a working paper for a forthcoming Vanderbilt Law Review Symposium that the theoretical Berle-Means Corporation of the last century—where owners played no role in management—has taken on a new form. The era of millions of dispersed retail investors has been replaced by a much smaller number of institutional investors, who have the economic advantage of lower-cost collective action to influence management decisions and elect directors.
In director elections, Gordon suggests instead of “just vote no,” the next step should be “short-slate” proposals. We witnessed last year a fairly high success rate in passage of short-slates where the intent was to nominate one or several directors without changing control.
The other question is whether proxy solicitation firms are up to dealing with shareholder activists using the Internet to achieve their proxy goals.
Here are some strategies that companies might consider in dealing with the relatively new medium of the Internet and its inherent social networks as means for investor communication.
1. At a minimum, companies should monitor these networks to assess their vulnerability on proxy issues and issues outside of the proxy, such as those related to corporate social responsibility. If they see momentum building behind a particular issue, they should consider taking the offense and reaching out to their investors, institutional and individual, to garner support for management’s position. How to they do this?
Meet one-on-one with those among their institutional investors who actually vote the proxies, particularly firms that have their own criteria for voting and do not rely on the proxy advisory firms to tell them how to vote. This can also be a way of negotiating behind the scenes for support.
Establish a separate Web site devoted to two-way communication with the company’s shareholders. Someone who is Internet savvy should create this site, not a service provider accustomed only to creating a one-way means to communicate data and other corporate information. This site needs to be creative and interactive as a means for conducting corporate campaigns to garner investor support. The SEC recently passed a rule to allow the establishment of electronic shareholder forums. An early take on these, from a corporate perspective, is one of fear that they will become “the devil’s playground,” in spite of the fact the rule exempts the company for liability for what others might say in the forum. You should not, however, negotiate over the Internet as one might in a one-on-one situation.
In the near term, the company should form a team consisting of the corporate secretary, investor relations and corporate communications officer(s), and someone within the company or an outside consultant who knows how to communicate via the Internet. This team would develop the campaigns to win investor support by presenting the corporate positions on proxy and governance issues.
In the longer term, I see the need for creating a new corporate officer—say, a vice president for proxy strategy—who is from the Internet-savvy generation and a communications strategist who can develop effective campaigns in support of management positions. This person would be able to stand toe-to-toe with the shareholder activists using their means of communication, whether through the Internet or direct communication with the board. Companies should use a proactive approach, remembering that the best defense is a strong offense. In this context, taking a “wait and see” attitude could be deadly.
While the communications emphasis should be on the institutional investors and hedge funds, you should not forget the retail investors. In some recent proxy contests, individual investors provided the swing vote in passing shareholder proposals. The anticipated emphasis this year on “say-on-pay” proposals could well inspire individuals, as well as institutions, to vote when they don’t see a correlation between corporate performance and the amount executives are being paid. The ability to connect directly with individual investors should be enhanced by the recent New York Stock Exchange requirement that brokerage firms re-solicit their beneficial owners to determine if they want proxy-related communications directly from the companies.
To put this entire issue into perspective, one should recall how many of today’s Internet giants were incubated in the dorm rooms or homes of some very bright young people who envisioned a new way of communicating. Consider this scenario: A graduate student with a passion for a corporate social responsibility issue uses Face Book, YouTube, and a combination of other social networking platforms to come out of left field with a guerilla assault— involving a large number of followers—on the company’s reputation. How many companies and their outside consultants are ready to deal with this?