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Use it or lose it

4 June 2016 By Richard Beales

For all its imperfections, shareholder democracy has real value. For evidence, look no further than a plethora of cases this week where voting is proving to be of great consequence.

Facebook’s board is planning now for the future of founder Mark Zuckerberg’s supervoting power, while investors in Swiss building-materials maker Sika are fighting the sale of just such a controlling minority stake. Sometimes, as at Tribune Publishing, votes are merely protests. A mistake at the ballot box, however, is costing T. Rowe Price hard cash.

It’s too easy to be jaded about some initiatives. For example, the shareholder votes now required by the U.S. Securities and Exchange Commission on executive pay are not binding. Yet it has turned out that in most cases boards have tried to change plans if even a large minority – maybe 30 percent or so – express displeasure with the rewards. In a reversal from the steady increases in recent years, average compensation for the highest-paid U.S. corporate chieftains fell by 15 percent in 2015, according to Equilar.

Likewise, it’s easy to argue that investors who buy into companies with multiple classes of shares know what they are getting themselves into. Witness the havoc at Viacom, where nonagenarian Sumner Redstone is using his elite voting status to keep a firm grip despite persistent questions over his mental competence.

It’s true that for as long as Zuckerberg at Facebook or Google’s founders, to name a few, display the golden touch, shareholders aren’t apt to complain much. The problems tend to come when the individuals in control mess up at the disproportionate expense of other owners. Zuckerberg, for example, has 54 percent of the votes at Facebook but only a 15 percent financial interest.

To the credit of the $340 billion social-networking behemoth’s board, it said on Thursday that it wants shareholders to approve a change to the terms of Zuckerberg’s supervoting Class B shares to ensure that if the 32-year-old someday stops running Facebook, his shares will convert into normal voting ones.

The proposal coincides with Facebook’s plan to issue a new class of non-voting stock that will further entrench Zuckerberg for the time being, which is a less enlightened governance move. Still, it shows a sensible desire to forestall possible tension with investors down the road.

That’s exactly what didn’t happen at $9 billion Sika. The controlling Burkard family struck a deal to sell its holding vehicle to French giant Saint-Gobain for a hefty $2.8 billion, essentially leaving the other shareholders in the cold. The Burkards’ 52 percent voting control and 16 percent economic interest mirror Zuckerberg’s position at Facebook.

Sika’s independent board members and other investors, including the usually below-the-radar Bill & Melinda Gates Foundation Trust, have fought the sale since it was unveiled in late 2014. So far, they have been successful in enforcing non-controlling shareholder protections that the Burkards have argued do not apply to the sale as structured.

Moreover, Sika’s financial performance has held up. But Saint-Gobain said this week it’s still set on the deal despite the lengthy battle. The minority shareholders face twin dangers: if they eventually win, the distraction may by then have damaged Sika’s business; and if they finally lose, the value of their investment will depend entirely on Saint-Gobain. More respect for matters of shareholder democracy could perhaps have avoided the conflict or pointed to a negotiated solution.

As when electing people to office, the ballot choices aren’t always perfect. Gannett, the U.S. publishing group whose pursuit of Tribune Publishing has been rebuffed, didn’t have the right timing to put its own director nominees up for a vote at its target’s annual meeting on Thursday. Instead, it asked investors to withhold votes from Tribune’s own directors.

The certified count isn’t yet available, but Gannett reckons five of eight directors received less than 50 percent support from Tribune shareholders if board insiders’ votes, including a 16.5 percent stake associated with Chairman Michael Ferro, are excluded. Tribune says all directors had majority support.

The competing statements are potentially consistent in mathematical terms, and they allow both sides to claim victory. The withheld votes may only serve as a protest, however, if the Tribune board keeps placing hurdles in the way of discussions with Gannett and instead pursues a jargon-riddled rebranding as Tronc (with a lower-case “t” in the company’s materials) and what looks like a form-over-substance transfer of its listing from the New York Stock Exchange to the tech-heavy Nasdaq.

Yet even votes that don’t appear to change outcomes can matter. A group of investors who objected to Michael Dell’s $25 billion deal to take his eponymous computer company private in 2013 won a ruling in a Delaware court this week that will net them nearly an extra 30 percent on the deal price. T. Rowe Price wanted to be part of the lawsuit, but was excluded because it mistakenly voted in favor of the buyout at the time.

The investment manager is now figuring out how to reimburse its clients, who but for the error would have been nearly $200 million better off, according to the Wall Street Journal. It’s another argument for all investors, whether the pushier sort or traditionally passive ones, to pay close attention to voting. Even second-order effects can cost real money.


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