A new phase in the corporate governance revolution at Ogden Corp
All the right ingredients were there for a governance showdown. In 1997, entertainment, aviation and energy company Ogden Corp was castigated in the press by Business Week, which ranked the company ninth among the worst boards in America; and by Chief Executive magazine, which included Ogden's board as one of its five worst. Complaints centered around the fact that the directors were too old, too narrowly focused and that interlocking relationships between them and the company compromised their independence.
Criticism also focused on Ogden's performance. Over CEO Richard Ablon's tenure, the annual return was 9.5 percent, compared to returns for the S&P 500 and S&P 400 Midcap of 19.5 percent and 16.9 percent. 'The stock goes nowhere while the strategy goes everywhere,' commented Geoffrey Colvin in Fortune.
Ogden appeared ripe for a proxy contest and noisemaker Providence Capital went for it. Providence's Bert Denton argued that during Ablon's time at the company, the board and senior management had failed to implement a focused business strategy capable of delivering increased shareholder value. He called for Ogden to spin off its 'waste-to-energy' business and suggested a large share repurchase program using the resulting cash. More significantly, Providence proposed revitalizing the board and put forward a slate of three directors.
Success seemed possible when proxy advisory firm Institutional Shareholder Services came out in support of the dissident nominees. 'Although the company has embraced reforms and is working to turn performance around, a new crop of directors with management experience who are committed to maximizing shareholder value remains the missing ingredient,' wrote senior analyst Eric Williams.
But victory for Providence was not to be. Ogden won by a 91 percent majority at its May 20 annual meeting, with DF King acting as proxy solicitor for the company while MacKenzie Partners handled Providence. Ogden argued that Denton had underestimated the value of corporate governance changes already implemented as well as ignoring improvements in the company's performance over the last year. More accurately, perhaps, he was outmaneuvered by Ogden's campaign tactics.
Into the corner
'Denton's problem was that he believed the negative press clippings to be current. If he'd done his research he'd have realized where the institutions actually stood,' comments Quintin Marshall, senior VP at Ogden. According to Marshall, many of Providence's proposed governance changes had been adopted voluntarily by the board before discussions with Providence even took place. Ogden adopted a mandatory retirement age policy, for example, which led to the resignation of four directors. Another director also resigned after the new policy prohibited interlocking relationships. The same initiative saw the company severing its relationship with a law firm where another director worked. Two vacancies were filled immediately and executive search firm Russell Reynolds was employed to help fill the other three. Furthermore, the company's stock had outperformed the S&P 500 in 1997, giving shareholders a total return of 53.8 percent compared to 47.9 percent for the S&P 500.
'We told Denton about the corporate governance initiatives when he first asked to meet with us in March. He has since stated that he was responsible for forcing us into a corner but that's just a public relations effort. He had no influence on these governance changes,' says Marshall.
Denton's proxy solicitor, Stan Kay of MacKenzie Partners, argues otherwise. 'The company can say whatever it likes but the facts are that once we started negotiating, they started reshaping their governance structure,' says Kay. And the investment community, which was told about the changes on the same day the Providence contest was disclosed, seems to agree. 'The board had been in place for eight years and nothing changed. Then you get some shareholder activists poking around and suddenly the company's implementing governance changes left right and center,' comments one analyst.
But according to New York-based investor advocate Gary Lutin, the controversy over who initiated the governance changes is probably irrelevant. 'What is important is that this was an example of corporate management learning about, and adapting to, evolving standards of corporate governance. More significant still, the fact that the company won the battle on the grounds of being the driving force behind change demonstrates a dramatic shift in the whole governance debate. This simply wasn't happening in proxy contests a year ago,' says Lutin.
ISS's Pat McGurn agrees. 'There's an important lesson for companies here. When claims surrounding governance issues are made, a company will do well if it responds by initiating governance changes.' According to McGurn, the nature of the contest shifted when CEO Ablon said he would quit if the dissidents got on the board. 'That wasn't what it was about for us,' says McGurn. 'We didn't buy into Providence's rhetoric about management changes. Our analysts' feelings hinged simply on the need for greater independence on the board. With this move, Ogden took the rug out from under Providence. It changed the dynamics of the vote and lessened Providence's potential support,' says McGurn.
A question of intent
Ogden's Marshall questions Providence's motives for entering into the proxy contest in the first place. 'From our initial discussions through to when they filed preliminary material, we made every effort to compromise. They weren't interested even when it was obvious that change was underway. They'll say their real intent was to improve shareholder value. We felt they just wanted to get paid,' says Marshall, referring to Denton's alleged request in April for a $50,000 a month retainer in 'investment banking fees' in return for giving up the proxy fight at Ogden. The company claims that Denton dropped the request after criticism in the press. But MacKenzie Partners' Stan Kay says that to his knowledge the request was never made. As for the negotiations: 'Bert was keen for them to be successful. That's why we held off until the end to solicit for votes.'
But this is not the first time Denton has asked for fees from companies he is targeting for change. And in some cases he has been successful. Last year, for example, Ashland paid Denton $75,000 in order to avoid a proxy contest. 'The settlement with Mr Denton was an overall compromise. He agreed to withdraw his slate of nominees for directors, thus avoiding a costly proxy contest,' the company said.
There is logic to this argument: if Denton manages to bring about change on behalf of, and for the good of, other shareholders, then he should get paid for it. On the other hand, most shareholder activists make do with an enhanced return, not a check cut at shareholders' expense. And if change was already underway, why would Ogden need to pay Denton off? 'We've always had a very active, open dialogue with our shareholders so we know what they want. Denton clearly misunderstood them. That's why we were so prepared to go for the vote,' argues Marshall.
Whether it was Ogden or Providence that initiated the corporate governance changes, or brought up the issue of payment, the company certainly won the public relations battle. The task now ahead for Ogden is to sustain and build on the governance changes that it has already put in place. 'Ogden did show itself to be responsive in terms of best practice but I'm sure shareholders will continue to watch what the company does closely and will come down hard if they don't feel the initiatives are being implemented,' says ISS's McGurn.
Marshall argues that senior management and the board are well aware of what lies ahead. 'We said in the proxy fight and we'll say now that our job is to execute. If we continue to deliver on shareholder value and on the corporate governance front, we'll do fine. If we don't, we'll be out of a job.'
As far as proxy fights are concerned, 1998 has been a relatively quiet year throwing up little of note for proxy watchers. But what has been seen – at Ogden, at least – demonstrates a new phase in the 1990s corporate governance revolution. 'The battle was fought over who should implement the changes, not over the need to change,' comments Lutin. 'It shows that the new standards of corporate governance have become broadly accepted and that the smart way to win a control contest is by taking the agenda away from the activist.'