Manage large shareholders like large states ‒ and don’t take core voters for granted
As the dust settles and the circus leaves town, the unexpected outcome of the US presidential election provides a cautionary tale for corporate directors encountering a shareholder vote.
While Donald Trump’s campaign was widely regarded as undisciplined, unfocused and scattershot, the results speak for themselves. A decisive victory in one of the most heated campaigns in history reveals some important lessons for directors who will find themselves competing for the hearts and minds of proxy holders in the face of a shareholder activist, hostile bid, or even a contentious annual meeting.
Directors need to think and act like the candidate, think of their company strategy as a campaign platform, and think of the movement of their stock as real-time polling data passing judgment on their performance. Most importantly they need to appoint a CCO – chief campaign officer – to oversee a finely tuned electoral machine.
It all starts with an accurate read of your electorate. While this may sound obvious, the value of stratifying shareholders along with voters is often underappreciated. For voters this is most commonly done on the basis of demographics or issues. In the case of shareholders it is important for management to understand that rarely are shareholders 100 percent with or 100 percent against you. There are variations within that spectrum that need to be identified and recognized so their unique concerns can be addressed directly. For example, perhaps they like the long-term strategy of the company but have an issue with this year’s compensation plan. In this situation directors may hold on to their seats on the board but be exposed on a say-on-pay vote.
Large shareholders are like Texas, California, Florida, Michigan and Ohio: their size gives them a big say in the outcome, and they need to be managed in a similar way. No presidential candidate would dream of showing up on election day and expect Ohio to fall his/her way, yet we see too many proxy votes where directors expect a preordained outcome at the ballot box. Both Hillary Clinton and Trump made more than 25 visits to the state of Florida alone. Large shareholders can set the tone for the rest of your shareholder base, and long-term relationships with them well in advance of a vote are critical. Directors need to get active, hit the campaign trail and visit regularly with those proxy voters they need the most.
One of the most important voting blocks companies often fail to proactively address are those shareholders that follow the recommendations of the large proxy advisory firms. In some ways their role is analogous to the electoral college system. While some within a state ‒ let’s say Florida ‒ may support you, not enough support will provide a result that disproportionately affects the outcome. In the case of institutional shareholders, directors may find the portfolio managers who make the money decisions are supportive and are buying shares, yet the fund may have a policy of strictly following the recommendation of the proxy adviser. Like Florida’s 29 electoral votes, you may find a large shareholder suddenly stacked with or against you, regardless of what you thought the sentiment was.
If one of these large blocks does go against you, a path to victory can be found by stitching together smaller, more ambiguous voter coalitions; as Trump demonstrated, it is possible to put together a coalition of hidden voters. In the case of a proxy vote, this means reaching out to the moms and pops who own your stock. These are people who have generally been left untouched by your company’s investor relations program, may have a different tolerance for your company’s underperformance if their life savings are on the line, and may never have cast a vote before. As Trump demonstrated, activating the hearts and minds of thousands who have been historically excluded from the process can mitigate the impact of a campaign surrounded by the biggest names in Hollywood.
Of course, none of this matters if your voter doesn’t actually turn out. The key demographics Clinton counted on simply didn’t show up, especially in the places she expected to be the strongest. One of the most shocking yet common challenges we find is the number of company management and insiders who simply don’t vote their shares. The attitude ‒ like that demonstrated by Clinton supporters in the final days ‒ seems to be: it’s all well in hand, we’re so confident I don’t need to make an effort. Too many companies take their supporters for granted and fail to actually confirm a shareholder’s vote intention, whether or not it will actually vote and, eventually, whether it actually got its vote in.
In motivating that vote, personal brand plays a big part. Regardless of what you think of the specifics of the message, a case for change can be a compelling narrative, especially when it is coming from someone voters believe will do what he or she says. Despite his many faults, Trump is someone voters trust to stand up for them and make good on his promises. This trust factor escaped Clinton and was compounded by her delusive handling of email and health issues. Directors would do well to remember business decisions don’t come down to the information on the page, but how much you trust that information: delivering on your strategy, producing results, being transparent and taking time to build your personal capital with shareholders matters.
Like the prevailing view of the Trump campaign, directors who dismiss an activist threat or shareholder opposition as ‘irrational’ or ‘misplaced’ will find themselves out of work if they fail to get the underlying mechanics of their campaign right.
Ian Robertson is executive vice president at Kingsdale Shareholder Services