Companies Forgot About Mom-and-Pop Investors...Until Now
July 19 2016 - 5:59AM
Dow Jones News
By Vipal Monga and David Benoit
Companies under pressure from shareholder activists and other
big investors are increasingly turning to an unlikely source for
help: mom and pop.
Railroad operator CSX Corp, agriculture giant DuPont Co. and
others are analyzing voting data and adopting new marketing
techniques to target individual investors in corporate elections
over everything from board makeup to executive pay.
CSX, stung by defeat in a campaign against activists, jazzed up
its shareholder mailings and now even plants trees to encourage
individuals to vote. DuPont launched an ad blitz aimed at small
shareholders as part of its successful effort to fend off activist
investor Trian Fund Management LP. And Humana Inc. hit the phones
to secure enough votes for its proposed merger with Aetna Inc.
To win over those shareholders, companies are borrowing tactics
from the political realm, where voter turnout may help determine
who becomes the next president, said Eric Cantor, the former House
majority leader who is now vice chairman at investment bank Moelis
& Co.
"A retail investor is not too dissimilar to an unlikely voter
who is not registered," he said. "The universe of voters is what
matters. If you expand the universe, you'll be more
successful."
On their face, the costly and time-consuming efforts don't make
a lot of sense given trends in shareholding. A small number of big
holders like BlackRock Inc. control most shares and vote
religiously. Meanwhile, individuals who directly buy stock are
shrinking as a portion of the total pool of shareholders and often
don't even open ballot packages before throwing them away.
But crucially, retail shareholders tend to support management
when they do vote. That makes them attractive in close calls and in
say-on-pay votes, where anything less than 70% support can raise
red flags for governance watchers and activist investors looking
for an opening.
Take Jacksonville, Fla.-based CSX. In 2008, it lost a bitter
challenge from two activist hedge funds that wanted to split the
chief-executive and chairman roles and change the company's
compensation structure. Since then, it has been keen to woo retail
investors, who own about 30% of the company's stock, said Mark
Austin, CSX's assistant corporate secretary.
Three years ago, the company sought help from Broadridge
Financial Solutions Inc., which prepares, ships and counts most of
the proxies U.S. companies send out each year. Broadridge also taps
its database to develop profiles of likely voters.
Broadridge redesigned CSX's proxy packaging, replacing formerly
nondescript black and white documents with ones featuring trains
streaking across sunlit fields. The packaging also prominently
displays messages encouraging shareholders: "Exercise our *Right*
to Vote."
CSX also now offers to plant a tree for every registered
shareholder who votes. Since 2013, it has planted 18,459 trees,
according to a company spokeswoman.
Mr. Austin of CSX estimated that the company has spent hundreds
of thousands of dollars on the expanded packages. He says it wanted
to boost retail voting to "reduce the likelihood of unexpected
results." In 2015, 22% of CSX's retail shares were voted. That's up
from 20% in 2013 but still below average.
Humana last fall needed approval from 75% of its shares
outstanding to proceed with its planned sale to Aetna. To pick up
insurance votes, its proxy solicitor, D.F. King & Co., made
more than 40,000 calls, according to a person close to the deal. In
the end, the vote wasn't close, with Humana shareholders
overwhelmingly approving the deal. (Before it can happen, the
proposed tie-up still needs approval from regulators.)
Proxy solicitors caution that big investors still hold sway in
corporate elections. Individual investors held just 34% of shares
in U.S. public companies in 2015, down from 39% in 2008, Broadridge
says. And getting smaller shareholders to participate is no easy
task. Mom-and-pop investors collectively voted just 28% of their
shares in 2015, down from 32% in 2008.
Still, the efforts to mobilize them show that measures to
improve corporate governance -- such as making directors stand for
election each year and giving investors a nonbinding vote on
executive pay -- may be making companies more accountable to all
shareholders. Meanwhile, activist investors have grown in influence
and the pension and mutual funds that once could be counted on to
support management have become more demanding, meaning smaller
shareholders are increasingly important for companies under
attack.
DuPont's ability last year to use retail shareholders to help
fend off Trian has been widely discussed among companies looking
for advantages against activists.
Trian wanted a breakup of DuPont and board seats, including for
its co-founder Nelson Peltz. The company's outreach included
tailored mailings to retail investors, which held about 30% of the
stock, and ads in hometown papers in Wilmington, Del. About half
those shares voted in the contest -- overwhelmingly in favor of
DuPont's chosen slate of directors.
When DuPont eked out a win by less than 6% of shares
outstanding, Mr. Peltz credited retail voters.
(END) Dow Jones Newswires
July 19, 2016 05:44 ET (09:44 GMT)
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