www.proxyinsight.com

July 2016Volume 3, Issue 7

VOTING NEWS

PROXY MONTHLY

WORKING WITH ACTIVISM: ROLLS ROYCE & VALUE ACT

IMPOSING MINORITY REPRESENTATION: AN ANALYSIS OF CUMULATIVE VOTING

With the United Kingdom

deciding by a slim margin

to extricate itself from the

European Union, much of the financial

world is currently preoccupied with

the collapse of stock prices worldwide

and the seemingly unrelenting decline

in the Pound Sterling.

However, a cursory observer can be

forgiven for believing that the fallout

from Brexit has had little to do with

proxy voting. On the contrary, the

initiation of Brexit has had a profound

effect on the corporate world. For

instance, it has thrown into question

the feasibility of the London Stock

Exchange-Deutsche Boerse merger,

given that it was to be established

in London and therefore outside the

single market. Indeed, Deutsche

Börse’s recent lowering of voting

threshold for the London Stock

Exchange’s tender offer from 75%

to 60% has been seen by many as

an attempt to save the deal from the

uncertainties of Brexit.

This month has also been poor for UK

corporate governance. The Huffington

Post contends that the overwhelming

majority of the UK’s FTSE 250 failed

to develop a contingency plan for

a possible Brexit. Similarly, the UK

government has recommended that

UK companies should have CEO

pay linked to their company’s cyber

security performance in order to

ensure that it receives sufficient

attention.

It is therefore perhaps unsurprising

that adjustments to UK corporate

governance have also been put back

on the cards with the ascension

of Theresa May to the role of

Prime Minister. Mrs. May has not

only reprimanded directors of UK

companies as being selected from the

same “narrow social and professional

circle”, but has also pledged to

improve worker representation and

make UK advisory say-on-pay votes

binding.

This sense of a transformation for UK

investor relations in the near future

is reflected in our first article, which

involves a summary of the Investor

Relations Society discussion on

Working with Activism. The session

looks at the drawn-out, behind

the scenes negotiations between

activist investor ValueAct and Rolls-

Royce earlier this year, which ended

with ValueAct gaining a seat on the

board – a rare occurrence in the

UK. The article includes details of the

negotiations and advice from experts

on what companies should do if

they ever find themselves in such a

situation.

Following discussions on the merits

of proxy access earlier this year, our

second article this month will look at

another method by which shareholders

can gain board representation –

namely cumulative voting. Although

to some, the widespread adoption of

majority voting as the preferred voting

system in numerous countries has

made cumulative voting increasingly

unnecessary, it is also worth pointing

out that the traditional plurality

voting system is far from being fully

eliminated. As a result, cumulative

voting still remains relevant in the

world of corporate governance. The

article will discuss the concept of

cumulative voting, its merits and

weaknesses, and present voting data

illustrating both its main proponents

and opponents as a voting system.

Proxy Insight is the only tool to offer

the voting intelligence necessary to

navigate today’s investor relations

market. If you are not a client and

would like to take a look, we would be

delighted to offer you a trial. Please

get in touch.

nick.dawson@proxyinsight.com.

Proxy statementNick Dawson, Co-Founder & Managing Director, Proxy Insight Limited.

2

[The majority of] the FTSE 250 failed to develop a

contingency plan for a possible Brexit.”“

Dawson started by providing

background to ValueAct’s July 2015

announcement of a 5% shareholding

in Rolls-Royce. The company had

just appointed a new CEO who had

to announce a profits warning on his

second day in the role. This followed

the resignation earlier in the year of

the previous CEO, following a series of

profits warnings and declining sales.

Reflecting on why Rolls-Royce was

targeted, Paterson commented that

activists take a long time to consider

their investments and act when the

risk balance skews in their favour. The

new management team presented an

opportunity for ValueAct to help shape

the company’s direction while the

profits warnings meant many investors

were prepared to sell, providing

optimum levels of liquidity.

Rossman recommends management

always consider who they are dealing

with. The likes of ValueAct have very

different modus operandi to someone

like Carl Icahn, he suggested. During

the initial period, it is critical to

construct a solid communications

strategy so everyone is aligned and

no-one says anything they may later

regret. He went on to recommend

that management should be on

the front foot and treat the activist

with the same respect as any other

shareholder.

From a media perspective Henson

commented that ValueAct had been

opportunistic, pouncing before the

new CEO had a chance to set out

his strategy. Lack of information in

the market leads to speculation and

IR teams should play a key role in

managing this process – unfortunately

for the company Dawson had himself

only just arrived.

Regarding communications, Paterson

noted that it is rare for an activist to

buy without speaking to the existing

largest investors. All companies

should know what their shareholders

really think, he added – “allow them

the ability to provide blunt feedback

therefore demonstrating that their

interests are

considered on the board.” Rossman

suggested that there is a widespread

lack of appreciation on boards

as to what shareholders really

want, and that activists may know

the shareholder base better than

companies themselves.

Dawson mentioned that ValueAct’s

position had increased to 7%

by October at which point they

requested a seat on the board.

Paterson recommends boards aim to

contain dialogue privately at this point

to understand the activist’s ideas

and identify any areas of consensus.

Henson suggested that the wider

shareholders would expect you to

engage regardless of your initial

feelings and to be careful to avoid

being drawn into a “media spat”

that could kill any chance of a good

conclusion.

Moderated by Director of IR at Rolls Royce, John Dawson and featuring Muir Paterson (COO of M&A Shareholder Advisory

at Goldman Sachs), Michael Henson (Managing Director at Sard Verbinnen & Co) and Jim Rossman (Managing Director and

Head of Corporate Preparedness at Lazard) this session provided a fascinating insight in to the events leading up to activist

investor ValueAct gaining a seat on the board of Rolls-Royce Holdings earlier this year.

Working with ActivismRolls Royce

3

Management should [...] treat the activist with the same respect as any

other shareholder.”“ValueAct had been opportunistic, pouncing before the new

CEO had a chance to set out his strategy.”“

During this period Rossman stressed

that normal IR efforts should continue

and in particular ensure that the

Governance Teams at each investor

are engaged with, since these people

will play a critical role in determining the

position of each investor. Additionally,

stock ownership monitoring is essential,

particularly to try and track the activities

of event-driven hedge funds.

Dawson concluded the events with

a further profits warning in November

which effectively paved the way

for ValueAct’s success. Paterson

suggested that the majority of

shareholders were questioning the

reliability of the Rolls-Royce board.

While Rossman conceded it was unfair

not to give the CEO time to set out

his plan, historic poor performance,

a challenging environment and a

new CEO created a perfect storm. In

March 2016 Value Act Nominee Brad

Singer was appointed to the board in

a deal which the panel believed was

a good outcome for Rolls-Royce, but

nonetheless marked the first instance

of an activist joining the board of a

FTSE 100 company.

“THE MAJORITY OF SHAREHOLDERS WERE QUESTIONING THE RELIABILITY OF THE ROLLS-

ROYCE BOARD.”

Key Lessons

Jim RossmanRecognise that all shareholders are very different;

Shareholders are becoming much more engaged so Investor Relations is critical;Concentrated share ownership means 10-12 can determine your future;

Index funds have a much larger influence

Muir PatersonActivism was seen as a US phenomenon - this is no longer the case;

Break down the walls and allow more board engagement;Shareholders want to become more vocal

Michael Henson You cannot take shareholder support for granted

Illustration 1: Investments of the activist ValueAct Source: Activist Insight

Activist Investing in Canada 2016November 14th – The Ritz Carlton – Toronto

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W. GRAEME ROUSTAN, ICD.DFormer Chairman, Performance

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NAIZAM KANJIOntario Securities Commission

PATRICE MERRINNon-Executive Director Glencore, plc; Stillwater Mining Company,

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ActivistInvestingCanada-2016.pdf 1 7/21/16 00:38

The Concept of Cumulative Voting

Cumulative voting is a system designed to

give minority shareholders a greater say

over the composition of the board than

they otherwise would receive under the

traditional plurality system. This is achieved

by awarding investors a number of votes

equal to their number of shares, multiplied

by the number of nominees standing

for election. These votes can then either

be divided among various nominees or

cast in favour of a single nominee. As a

result, large investors tend to separate

their votes among the diverse nominees

of the incumbent board, whereas minority

shareholders may place all their votes on

a single nominee in order to force that

individual onto the board. This individual

would then represent the interests and

concerns of the minority shareholders that

elected them.

However, cumulative voting is only

appropriate for specific voting methods.

For example, the prevailing majority voting

system requires that investors cast their

shares for, against or abstain for each

director in isolation – the pooling of

votes never comes into it. Consequently,

for many observers, cumulative voting

represents an ultimately futile attempt to

fix the archaic system of plurality voting.

This incompatibility is reflected in the

voting policies of various proxy advisors

and investors. For instance, Glass Lewis

states that “where a company has

adopted a true majority vote standard [… it]

will recommend voting against cumulative

voting proposals due to the incompatibility

of the two election methods.” Similarly,

both Goldman Sachs and Northern Trust

support the introduction of cumulative

voting, unless a company has previously

adopted, or intends to adopt, a majority

voting policy.

This in turn may partially explain Goldman

Sachs’ and Northern Trust’s high level

of support for proposals to eliminate

cumulative voting, despite their policies

being in favour of it. Indeed, for 28% of

proposals to eliminate cumulative voting,

there was also a proposal to put in place

a majority voting system at the same

meeting. However, it does not answer why

a company without majority voting would

vote against the introduction of cumulative

voting.

Disadvantages of Cumulative Voting

Cumulative voting allows minority

shareholders a greater input than under

the standard plurality system, thereby

ensuring that the board cannot entirely

ignore their interests and concerns lest

they force their own director(s) onto the

board. Following this logic, BlackRock and

Wellington support cumulative voting for

controlled companies precisely because

it prevents minority shareholders being

overruled by the controlling shareholder.

However, there are also problems

associated with cumulative voting.

Firstly, cumulative voting by design gives

minority shareholders a voice that is

disproportionate to the capital they invest

in the company, which, to JP Morgan and

Vanguard, undermines the “one share,

one vote” principle that is the cornerstone

of corporate voting.

Following recent discussions on the merits of proxy access, this article intends to look at another method by which

shareholders can gain board representation – namely cumulative voting. Cumulative voting remains something of a

contentious issue in the world of corporate governance. For some, it is an essential component for protecting minority

shareholder rights against an omnipotent board. For others, however, cumulative voting is an affront to the democratic

nature of corporate voting and provides for minority shareholder overrepresentation. This ongoing debate is reflected in the

haphazard voting patterns apparent in both proposals to provide and eliminate cumulative voting.

Imposing Minority RepresentationAn Analysis of Cumulative Voting

6

Cumulative voting by design gives minority shareholders

a voice that is disproportionate.”“

Secondly, the strategic voting that

cumulative voting encourages can

cause unintended consequences

associated with vote-splitting. Indeed,

a lack of cooperation between like-

minded investors may lead to either

the scattering of votes too sparsely to

receive board representation, or the

wasted votes associated with the over-

pooling of votes into a single candidate.

Thirdly, cumulative voting can lead to

directors that are only accountable to

the small minority of shareholders that

elected them. This in turn can lead

either to factionalism within the board,

as a majority of directors attempt to

undermine the insurgent director(s)

within their midst, or a hostile takeover,

as the new director(s) are used as a

foothold in the company and later a

springboard for the domination of the

company’s board.

This latter problem is especially

problematic for large investors. For

example, BlackRock vote for proposals

to eliminate cumulative voting 88% of

the time. According to their voting policy

this is because they “typically oppose

proposals that further the candidacy of

minority shareholders whose interests

do not coincide with [… BlackRock’s]

fiduciary responsibility. Although

BlackRock do acknowledge that

they “may support cumulative voting

proposals at companies where the

board is not majority independent [… or]

have a controlling shareholder.”

Consequently, for non-partisan

investors, unpersuaded fully by either

argument, the debate over cumulative

voting’s introduction or elimination

is a balancing act between the two

extremes of minority shareholder

impotence and minority shareholder

overrepresentation. According to

RBC’s voting policy, cumulative voting

“can ensure an independent voice

on an unresponsive board, or it can

allow a small group of shareholders to

promote their own agenda.” As a result,

some investors vote case-by-case on

such proposals depending on what

provisions for minority shareholders are

already in place at each company (e.g.

proxy access).

Cumulative Voting Data

Table 1 represents the voting of the

Top 10 key investors in favour of the

introduction of cumulative voting and

its elimination respectively. As the

table shows, the former involves a

mixture of mid-level asset managers

and pension funds, whereas the latter

contains various mid to high-level asset

managers.

The make-up of this table is perhaps

not that surprising. Pension funds are

largely supportive of the expansion of

shareholder rights and generally vote in

favour of proposals that are perceived to

enhance good corporate governance. By

contrast, despite their often small stakes

in a substantial number of companies,

large asset managers usually do not

require the protections that cumulative

voting is designed to provide for minority

investors. Indeed, such well known

investors often already have direct lines

to the management of the companies in

which they invest, which in turn would

make the introduction of cumulative

voting superfluous as a means to

improve their influence.

On the contrary, it seems to be the smaller

investors that are the main proponents

of cumulative voting, precisely because

they lack the company access offered

to larger investors. This is shown by the

fact that the ten largest investors only

voted in favour of cumulative voting’s

introduction 14% of the time compared

to an average of 42%.

“LARGE ASSET MANAGERS USUALLY DO NOT REQUIRE THE PROTECTIONS THAT CUMULATIVE

VOTING IS DESIGNED TO PROVIDE.”

Key investors that voted 100% for the introduction of cumulative voting Key investors that voted 100% for the elimination of cumulative voting

Investor name Number of resolutions Investor name Number of resolutions

American Century 28 TIAA-CREF Asset Management LLC 33

Maine PERS 26 BMO Global Asset Management (F&C) 21

State Universities Retirement System of Illinois (SURS) 18 Vanguard Group, Inc. 19

California Public Employees’ Retirement System (CalPERS) 14 T. Rowe Price Associates, Inc. 16

Harris Associates LP 10 BNY Mellon 15

HSBC Global Asset Management 8 Goldman Sachs Asset Management LP 15

MacKay Shields LLC 6 Wellington Management Company 13

Wells Capital Management 3 MFS Investment Management, Inc. 11

Macquarie Capital Investment Management LLC 2 Federated Investment Management Co. 10

Artisan Partners LP 2 Morgan Stanley Investment Management, Inc. 9

Table 1: Key investors that vote in favour of cumulative voting’s introduction and elimination Source: Proxy Insight

Theresa May pledges to reform

corporate governance

Prime Minister Theresa May will

announce a plan to reform corporate

governance in the UK as part of her

campaign to succeed outgoing Prime

Minister David Cameron.

Several British news sources reported

that May will pledge to give both

consumers and workers representation

in companies’ boardrooms, and to

make shareholder votes on corporate

pay binding, rather than advisory.

May points the finger at British

companies’ directors, saying that they

all come from the same “narrow social

and professional circles,” and do not

provide adequate scrutiny.

Almost two-thirds of MPs from the ruling

Conservative party supported May

in her race to replace Cameron after

his resignation in June, following the

outcome a referendum on “Brexit,” in

which UK citizens voted for the country

to leave the EU.

House blocks SEC universal proxy

ballot

The House of Representatives

has recently moved to prevent the

Securities and Exchange Commission

(SEC) introducing a universal proxy

ballot for contested elections. The

House voted on 7th July 243-180 to

add to a spending bill for the fiscal

year beginning 1st October language

that would prevent the SEC from

implementing a universal ballot rule.

The SEC has declared that the

universal ballot would enhance

corporate democracy by allowing

shareholders to vote on board

candidates not backed by corporate

management. However, according to

Rep. Scott Garrett “while they sound

quite benign, universal proxy ballots

are a means for special interests

to easily nominate their preferred

candidates to a company’s board,

which would fundamentally change

the way in which public company

directors are elected in the United

States.”

Universal ballots are currently allowed

under SEC rules, albeit only if both

management and dissidents consent.

However, shareholders have to attend

a company’s AGM if they desire to

vote for candidates on both slates.

UN PRI plans to remove ESG pretenders

The UN organisation of Principles of

Responsible Investment (UN PRI) plans

to create a process to remove members

after complaints that some large asset

managers do little to encourage reforms in

areas such as climate change.

Managing director of Principles for

Responsible Investment, Fiona Reynolds,

said that she expects the organisation to

adopt rules by early next year that allow

the delisting of companies that fail to put

its principles into practice.

She declared that they “are committed

to increasing accountability,” and that

she “can’t see how you can increase

accountability without delisting the worst

offenders”.

Some critics of UN PRI point out that some

companies sign up to such principles,

but do little to address them. According

to Sonia Kowal, president of Zevin Asset

Management of Boston, such companies

only see UN PRI as “a marketing thing.”

Last year Zevin unsuccessfully supported

shareholder resolutions that called for

Franklin and T. Rowe Price to report on

how their proxy voting fitted with their

policy positions on climate change. Both

companies retorted that they already

consider environmental factors in voting

and also have fiduciary obligations to

their clients.

8

Critics of UN PRI point out that some companies

sign up to such principles, but do little to address them.”“

News summaryA round-up of the latest developments in proxy voting.

Deutsche Börse lowers threshold for

LSE tender offer

Deutsche Börse has lowered the

threshold for London Stock Exchange

Group’s tender offer to acquire the

German company. In a Monday

statement, Deutsche Börse said

that 60% of its shares must now

be tendered for LSE’s bid to be

successful, instead of 75%.

The target company also extended

the deadline for the British boerse’s

25 billion euro offer to July 26, from

July 12.

Deutsche Börse said that the decision

reflected feedback from index funds

which had said they were only

technically capable of tendering their

shares after the minimum acceptance

threshold had been reached, and

once the untendered shares had

been replaced by the tendered shares

in their index.

The company argued that it was

confident that at least 75% of its

shares will be tendered anyway.

On 4th July, shareholders in LSE

approved the proposed merger.

Shareholder revolt at Alstom

62% of investors have voted against

the remuneration of Patrick Kron,

former CEO of industrial group Alstom.

Patrick, who left the company in

January, was set to receive €1 million

gross fixed remuneration, €1.16 million

in variable compensation, and €4.45

million worth of shares. This was

subject to the completion of the sale

of part of Alstom’s energy business

to US-based General Electric,

became effective in December 2015.

The French government was among

those that voted against and is Alstom’s

biggest shareholder, currently owning

20%. It has already voted against

compensation for Renault SA CEO

Carlos Ghosn and PSA Peugeot Citroen

head Carlos Tavares this year, although

the French economy minister Emmanuel

Macron has ruled out a legal ceiling on

executive pay.

Ex-NiSource execs receive golden

parachutes

Three executives who departed

NiSource one year ago have had

their positions removed at Columbia

Pipeline Group. This will allow the

three executives to collect the lucrative

golden parachutes that were prepared

for them.

TransCanada Corp. informed Columbia

CEO Robert Skaggs Jr., President Glen

Kettering, and CFO Stephen Smith two

weeks ago that their positions would

be terminated due to the acquisition

of their company, which occurred on

Friday. These three executives left

NiSource for Columbia when NiSource

spun-off into a separate, publicly traded

company. After the spin-off, Columbia

expressed its interest in being either

merged or purchased.

The golden parachutes will equal $23.6

million for Skaggs Jr., $9.55 million for

Smith, and $7.27 million for Kettering.

Various shareholders filed lawsuits

against Columbia over the sale to

TransCanada due to the payment

of golden parachutes to the three

executives. They argued that such

payments presented a conflict of

interest that biased them in favour of

the sale.

However, at the Columbia

shareholders meeting on June

22, approximately 80 percent of

shareholders, in a non-binding proxy

vote, voted in favour of the golden

parachutes. Also in a binding vote,

roughly 95 percent of shares voted

were in favour of the merger terms.

CEO pay should be linked to cyber

security

According to the UK government

committee of Culture, Media, and

Sport, chief executive compensation

should be linked to their company’s

cyber security performance.

The committee recommended a list

of requirements for companies to

lessen and respond to data breaches,

including cyber security and data

protection strategies as well as

adding cyber security to companies’

annual reporting alongside social

and environmental risks.

However, the recommendations also

included various measures designed

to make executives, including

CEOs, more accountable following

data breaches. Moreover, such

recommendations suggested that

the remuneration packets of CEOs

be directly linked to their companies’

security in order “to ensure this issue

receives sufficient CEO attention”.

9

“DEUTSCHE BÖRSE SAID THAT 60% OF ITS SHARES MUST NOW BE TENDERED FOR LSE’S

BID TO BE SUCCESSFUL, INSTEAD OF 75%.”

Compensation should be linked to their company’s cyber security

performance.”“

Board failure during Brexit?

According to the Huffington Post

“the vast majority of the UK’s FTSE

250 companies had not discussed

contingency planning for a possible

Brexit with the chairman of the board or

the chairman of the audit committee”.

This contrasted with US banks which

“appeared better prepared for the risks

of Brexit based on the results of the

Dodd-Frank stress tests completed the

day of the vote.” Indeed, the Huffington

Post contends that the US banks were

better prepared for the volatility of the

market in the short-term and legal

and regulatory requirements, market

access, and infrastructure change in

the long-term.

The online newspaper went on to

suggest that FTSE 250’s lack of

preparedness for Brexit emphasised

the need for more diverse boards in

order to bring a more global perspective

to the UK boardroom. This in turn would

supposedly provide a fresh awareness

of the various risks and opportunities

inherent within a global marketplace.

“Brexit reminds us that boards must

be comprised of people with the right

qualifications, who are aware of the

global context, in order to collaborate

effectively with management to

grow the company’s value in today’s

marketplace.”

Kenya’s corporate governance improves

Various analysts have declared that Kenya

is making great strides in improving the

country’s level of corporate governance.

According to Celestine Munda, Ernst &

Young Head of Advisory Services in the

East Africa Region, Kenya has carried

out a multitude of reforms to enhance

the regulatory environment of corporate

governance. As a result of these reforms

“Kenya is highly ranked in Africa as having

one of the best corporate governance

regimes”.

Kenya’s Capital Markets Authority (CMA)

developed a corporate governance

code for publicly listed companies in the

country, which endeavours to improve the

accountability of directors to shareholders.

According to Munda, corporate

governance codes play a vital role in Africa

for eradicating corrupt practices in both the

public and private sector. However, making

companies comply with existing corporate

regulations often proves difficult.

Kenya was recently ranked among the top

five improved countries in Africa for corporate

governance in a report conducted by the

Africa Corporate Governance Network and

the Institute of Directors.

Investor anger at Stock Spirits over NEDs

Several investors at Stock Spirits are

annoyed with the company’s appointment

of Alberto da Ponte and Randy Pankevicz

as non-executive directors (NEDs). Both

directors were elected to the Stock Spirits’

board at the company’s AGM on the 23rd

of May.

The appointment of da Ponte and

Pankevicz had been advocated by Stock

Spirits’ shareholder Western Gate Private

Investments. As a result, many investors

were disappointed to find out that Stock

Spirits’ categorised the two new directors

as NEDs, as this considerably inhibits

both directors in attempting to bring about

change at the company. Unsurprisingly,

many investors believe that this is not what

Stock Spirits’ investors voted for at May’s

AGM.

By treating da Ponte and Pankevicz as NEDs,

they will not able to sit on Stock Spirits’ audit,

remuneration or nomination committees.

Moreover, in an interview with the Financial

Times, chairman David Maloney also said

the new NEDs would be asked to leave

board meetings if commercially sensitive

information was discussed.

Three New World Oil & Gas directors resign

Three board members, including the non-

executive chairman, at New World Oil &

Gas PLC who were facing removal by the

company’s shareholders have resigned

before the EGM. The EGM will now not take

place.

According to New World Oil & Gas at

the time: “The purpose of the EGM to

be convened is to provide shareholders

with the opportunity to vote on ordinary

resolutions calling for the immediate removal

of Christopher Einchcomb, Stephen

Polakoff and Georges Sztyk as directors of

the company, pursuant to Article 37 of New

World’s Articles of Association.”

The board now comprises solely of directors

Nicholas Lee and Adam Reynolds.

10

“THE VAST MAJORITY OF THE UK’S FTSE 250 COMPANIES HAD NOT DISCUSSED CONTINGENCY

PLANNING FOR A POSSIBLE BREXIT.”

Kenya is highly ranked in Africa as having one of the best corporate

governance regimes.”“This is not what Stock Spirits’ investors voted

for at May’s AGM.”“

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