The history of proxy contests – the high-stakes battles for corporate control between shareholders agitating for change and incumbent management teams – is replete with colorful stories of one side blindsiding the other with salacious opposition research: an incumbent director or nominee’s taste for drugs or escorts, a second family, fake college degree, or prior fraud conviction.
But what happens when an investigation into the opposing side’s directors or nominees doesn’t turn up anything sensational enough for a riveting episode of Succession? Do we, as investigators, report out a couple of old speeding tickets and go on our way? The answer, of course, is no.
While surfacing evidence of criminality or grossly unethical behavior is an important first step to establishing whether an incumbent director or an activist’s nominee is fit to hold sway over a public company, the best investigative work digs much deeper. In fact, our most consequential work often comes when we investigate a director or board candidate’s past performance and track record as an executive or public company director. We look for evidence or patterns of poor corporate governance or mismanagement, inaccurate representations of track record or credentials, indications of personal or professional fraud or misconduct, and problematic online activity.
Here are three critical areas of focus in a comprehensive proxy investigation:
Track Record as a Board Director
First and foremost, we pay attention to the candidate or incumbent director’s track record on other public company boards, past and present. We look to see if the director, for example, sat on the compensation committee of a board whose say-on pay vote received meager support from shareholders. Or if the director served on an audit committee of a board that has dealt with financial reporting issues and has had to revise guidance or disclose material weakness in the company’s internal controls. (Picture the company that fired its public accounting firm three times in the span of as many years and repeatedly filed its financial statements late. Not a great look for the members of the audit committee.)
And of course, sometimes what isn’t there could wind up being the most relevant thing of all. Some candidates have fairly vanilla track records where what’s notable is what is missing from their resume – for example, relevant experience that would add a needed or helpful expertise or skillset to a company’s board.
Reputation as an Executive
We also conduct extensive research into the incumbent or prospective director’s stewardship of companies over which they exercised executive control. This includes deep reviews of relevant press, litigation, regulatory filings, and other, less obvious open sources to assess the financial or operational performance of departments under the individual’s leadership.
Consider the longtime C-suite executive who is being put forth by an activist investor to chair the board of a company in which the activist holds a sizable stake. The chairman candidate’s decades-long track record as a senior executive of other public companies should be highly relevant to the public company’s evaluation of the chairperson candidate and of the activist’s campaign overall. If, for example, the executive was found to have led companies that were accused of fraud or faced regulatory scrutiny, their candidacy might be a non-starter for the public company and could also help it gain leverage in its negotiations with the activist.
Potential Burden of Other Responsibilities
Last, but certainly not least, we look to see if the incumbent director or candidate serves on another board or in an executive role that would inhibit them from being able to carry out their responsibilities and deliver results. Beyond the standards set by ISS and Glass Lewis for “overboarding” (defined as sitting on two boards if the candidate is a public company officer or five boards if the candidate is not), shareholders should favor directors who are not burdened or conflicted by other executive or director responsibilities in ways that would render them less effective. If a prospective or incumbent director sits on just one board that is dealing with a serious legal or regulatory challenge, that could wind up materially affecting their ability to do a good job elsewhere.
It may not always be the stuff of TV drama, but investigative work that is focused on the nuances is critical to driving results in high-stakes activist situations.