Council of Institutional Investors

Study Examines Track Record of Florida SBA’s Proxy Contest Decisions
Thursday, July 9, 2015
by: Glenn Davis

Section: CII Governance Alert

The Florida State Board of Administration’s (SBA) support of winning dissident candidates in proxy contests translated into improved stock performance in both the short and long term, finds a recent SBA study.

The study examines how companies facing proxy contests affect fund performance, and whether SBA’s proxy voting decisions in these situations enhance fund performance. The review covers a nine-year period beginning in 2006, during which the SBA voted on 107 contests at companies with a market cap of greater than $100 million.

On average these companies enjoyed a 67 percent rise in total shareholder return (TSR), irrespective of the outcome of the contest, over the five-year period following the contest’s announcement. On an aggregate basis, these companies saw a 30 percent rise in equity value for the same time-period. Eight companies in the study had more than one proxy contest during the nine-year period of the study. In that group, Biogen Idec, which had two proxy contests, had the biggest impact on SBA value, contributing a $610 million gain to the SBA.

The review found that the fund’s best outcomes, as measured by five-year percentage growth in TSR, occurred in cases where the SBA supported at least one dissident candidate and the dissident group won at least one board seat. The fund’s worst outcomes, by the same measure, came in situations where SBA supported only management candidates and the dissident won one or more seats.

SBA is one of a handful of funds that voluntarily discloses its voting decisions in advance of companies’ meeting dates.

Among the contests reviewed, the winning side had Florida’s backing slightly less than two-thirds of the time. Moreover, the study reports that in all of the time periods studied (one-, three- and five-year periods) and for both relative and absolute measures, when the market voted differently than the SBA, stock performance lagged.  

Companies involved in proxy contests represent a tiny fraction of Florida SBA’s $185 billion portfolio.

The study comes in the aftermath of a 2014 Activist Insight list naming Florida SBA as the institutional investor that most frequently supports dissidents. Florida voted for at least one dissident candidate in 65 percent of contests reviewed in the study.

The SBA plans to update the study over the next few years, examining other types of company engagement, activist campaigns and proxy voting in order to determine their effects on portfolio value.

Q&A with Michael McCauley , senior officer of investment programs and governance, Florida SBA

What are the key conclusions from this study?
The study demonstrates that SBA’s proxy voting decisions have had significant and positive economic effects on portfolio value. The results also provide evidence of a sound analytical framework employed by SBA staff in evaluating proxy contests. Historical proxy voting decisions enhanced our portfolio performance through improved investment returns over both short and long time periods.

What does the study suggest about the concern that shareholder activism leads to short-term focus at the expense of long-term returns?
I think it underscores the lasting impact of such efforts, at least in terms of stock price performance (TSR). We found both short and long-term performance impacts. Among SBA votes to support one or more dissident nominees where the dissident won seats, the company’s subsequent one-, three-, and five-year relative cumulative stock performance was positive. The same returns for cases where SBA supported the dissident but management won all seats were negative. I strongly believe market forces will work over both short and longer time frames, with investors providing support for those activists who can demonstrate an ability to materially improve business operations and financial performance. These outcomes are what attract future capital and lead to growth in revenue and earnings.

The study covers a period that extends back to the mid-2000s. What changes have you noticed since then in the level of engagement between the SBA and the opposing sides in proxy contests? How does the dialogue surrounding contests play a role in informing the SBA’s vote?
Efforts to reach out to us and engage in high-quality discussions have ramped up significantly, with a positive shift in the level of involvement by individual directors.  Engagement provides an excellent opportunity for SBA investment staff to have candid conversations with management and board members on a variety of topics, including proposals to change business strategies, capital allocation, the need for improved corporate governance practices, the quality of director nominees and other issues that may have been raised by an activist fund or other segments within the company’s shareowner base. 
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