May 27, 2009
Dear Commissioners:
My name is Jon Lukomnik and I serve as Program Director of the IRRC Institute, a not-for-profit organization. The mission of the IRRC Institute is to provide thought leadership at the intersection of corporate responsibility and the informational needs of investors. We strive to produce objective resarch and do not advocate for any particular policy objective. Rather, we want our research to inform those who do so advocate.
We recently commissioned and released a study of the effectiveness of hybrid boards of directors. As you are aware, hybrid boards result when insurgents gain representation on the board, but do not control a majority of board seats. To date, this result has happened as a result of "short-slate" proxy battles, but this situation will likely increase as a result of the proxy access proposal.
Amongst the findings of the report were:
1. Shareholder value on average at ongoing companies improved under hybrid boards by 19.1% – 16.6 percentage points more than peers – from the contest period through the boards one year anniversary. More than half of that gain came during the three-month contest period: average share prices increased by 5.0% over the ensuing year, which is 3.6 percentage points better than peers.
2. Strong positive share price performance over the 15 months from the contest period through the hybrid boards first anniversary was increasingly likely when the dissidents owned a significant percentage of shares. When dissidents owned between 10% and 25% of shares, performance significantly outperformed peers by an average of 67.7 percentage points. In comparison, dissidents that held less than 5% of shares performed in line with peers, and dissidents that held 5% to 10% of shares moderately outperformed peers.
3. Among the ongoing businesses evaluated following the creation of hybrid boards, total share price performance for the 39 months from the three month contest period through the three year anniversary of the hybrid board, averaged 21.5% – 17.8 percentage points higher than peers – largely on significant contest period price appreciation averaging 10.1%. Over the 36-month period after the contest period, however, share price performance, averaged 0.7% or 6.6 percentage points worse than peers.
4. Shareholder activists have gained increased representation on the boards of targeted companies. During the four-year period covered by the study, dissidents were able to gain representation at some 75% of the companies targeted. Dissidents typically gained board seats through settlement agreements rather than an actual proxy contest brought to a shareholder vote.
5. Bankruptcy was not an objective of any dissident groups in the study but was the outcome under 5% of hybrid boards in the sample. This resulted in a loss of more than 99.9% of shareholder value at those companies.
6. While 35% of hybrid boards were formed by dissidents intending to sell the company, only 15% of this group announced or completed a sale transaction by January 2009.
Most of the companies examined continued as ongoing businesses, but 18% were sold during the study period. Among those sold, the sale price premium averaged 27.1% versus the undisturbed share price.
7. Hybrid board characteristics that were most strongly associated with relative shareholder return outperformance compared to peers included companies in which: dissidents owned between 10% and 25% of the firm equity new dissident and independent directors comprised between 20% and 30% of the target firms board hybrid boards were formed as a result of multiple hedge funds acting as a group to run a proxy contest.
I have attached the entire report to this submission, and enourage you to read it. If I can be of any further assistance please do not hesitate to email me.
Sincerely,
Jon Lukomnik
Program Director
IURRC Institute