Monday, November 2, 2009

Shamrock whips Texas Industries board

In a column in Sunday's New York Times entitled "When Shareholders Crack the Whip," Gretchen Morgenson writes about three directors failing to win reelection at Texas Industries. Shamrock Holdings, the firm that helped oust Michael Eisner from Disney, nominated the alternate slate of directors. The election results, according to the column, "are an example of what happens when shareholders act appropriately -- like the company owners they are."

The story appears to be good news for activists and governance advocates, but the novelty of such shareholder success is in itself a cautionary tale and those seeking to shake up corporate boards still have an uphill battle. Before launching its proxy contest, Shamrock received no response to its suggestions on how to improve governance and perforance issues at Texas Industries. "We had a read tough time getting management to sit down and talk to us...They just stonewalled us," said Shamrock. Shamrock estimates that its campaign cost $1 million and attributes its success to growing interest among mutual funds to support the activist route.

Morgenson notes that "no single election proves that investor attitutes are a-changing everywhere," but that is a major understatement. Pershing Square spent $10 million and failed to get a single board seat at Target. The Children's Investment Fund threw in the towel in its effort to get CSX to switch tracks.

Research by The Corporate Library shows that the more troubled the company, the more tone deaf the directors. A study of financial firms that required government assistance showed that boards ignored withhold votes by shareholders. Another study showed that nearly two-thirds of directors who received majority withhold votes retain their seats.

Fact is that it takes much more than a whip to take on an entrenched board of directors. Activist hedge funds and governance advocates need to get media and the SEC to shine a brighter light into the lack of responsiveness of boards. When it comes to proxy fights, sadly, there is a bigger lesson to be learned from the efforts that fail than the ones that succeed.

Update: SEC Chairman Mary Shapiro has called for changes in proxy access to make it easier and cheaper for shareholders to nominate corporate directors.

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