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Corporate boards of directors and management can -- and should -- be more proactive in preparing for and addressing increasing activism by shareholders.
Shareholder activism, which grew in 2007, is expected to continue to increase in 2008. Several factors led to this rise, including greater pressure to increase returns to shareholders and hedge funds seeking a variety of individual gains. In addition, new Securities and Exchange Commission rules were established that permit less costly electronic proxy solicitations. This allows shareholders to avoid the burden of complying with numerous laws and communications rules, and they are not required to file and distribute significant amounts of paperwork. Also, the establishment of electronic forums allows shareholders to communicate and generate support for a cause without being in violation of proxy rules. Shareholders now hold boards of directors and management more accountable for company performance and corporate governance, and dissident shareholders have achieved some notable successes. Vocal and active shareholders often promote one particular issue that may not be in the best interests of the remaining shareholder base. Their objections can also force board members to focus on short-term, rather than long-term, goals. At times, shareholder activists can distract boards of directors from focusing on their primary duties to provide strategic direction and oversee management. While management and the boards of directors of public companies have always tried to balance the Street's demand for quarter-to-quarter performance with actions aimed at long-term growth, the now pervasive scope of activist shareholders makes that balance more difficult to achieve. For example, hedge funds pressure management, with the ultimate goal of obtaining board seats, special dividends and stock buybacks. Often, they also seek the board's commitment to explore the sale of the business or force a company to negotiate better terms for shareholders. Shareholder activism is forcing boards of directors to respond more directly to the concerns and demands of large shareholders. These demands include greater accountability for executive compensation, board representation and short-term strategic options to enhance shareholder value. Shareholders' concerns are particularly prominent with respect to companies with languishing returns. Companies can adopt several proactive approaches to address increased shareholder activism, thus enabling them to be ahead of, rather than behind, the trend, including: These are appropriate corporate governance measures regardless of the activist shareholder initiative. Furthermore, the measures can serve to address the concerns of all shareholders before potentially disruptive activities of shareholder activists. The goal of any company should always be to alleviate shareholder concerns before they reach a crisis point. However, should a lawsuit, proxy contest or activist shareholder challenge arise, boards of directors and management need to be informed, deliberate and consistent in their response. They also need not be fatalistic, despite the significant power activist shareholders have gained in recent years. Each situation requires individual attention, the ability to develop and implement appropriate, measured responses, along with a realistic assessment of when to fight and when to forge a suitable settlement. Steven R. London and Matthew S. Gilman are partners with Pepper Hamilton LLP and have formed the law firm's shareholder activism team. CategoriesComments Deal Video
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HOUSING’S DEATH SPIRAL MUST BE STOPPED, AND THERE IS A WAY
By Marc Berger
The news is bad and will only get worse. Mortgage delinquencies and home foreclosures reached record levels the first quarter of this year, with California and Florida leading the way, according to the National Association of Mortgage Bankers. The number of new foreclosures and the number of homes in foreclosure reached a 29-year high.
I’ve seen this type of housing crisis before during the recession of the early 1990s, and we all agree, it’s not a pretty sight. But this is worse. Much worse. What makes foreclosures this time so devastating is that they continue to invade the housing market for all homeowners, not just those who have purchased or refinanced a home during the past several years. Each time a flood of foreclosures hit the market, it depresses housing values in areas where the foreclosures are occurring.
The economic reverberations for individual urban areas across the U.S. are enormous. Tax receipts are expected to fall by $6.6 billion in selected states, according to a report by Global Insight, which points out that nearly 130 cities around the nation will face sluggish growth; 65 major metro areas will see their economic activity diminish by a third. Job loss in these impacted areas could reach 525,000.
Based on new foreclosure projections by the Center for Responsible Lending, it is estimated that one in 33 current U.S. homeowners will be in foreclosure, many in the next two years. Among the states hardest hit are Nevada, where one in 11 homeowners could soon be in foreclosure; California, with one in 20; Florida, with one in 26, and Georgia, with one in 27. The destructive force of these massive foreclosures could create what I see as areas of economic “pocket depressions.â€
There is a solution, and it’s one the federal government has implemented once before with significant positive results, and that was the Resolution Trust Corporation. The RTC was a U.S. Government-owned asset management company mandated to liquidate assets (primarily real estate-related assets, including mortgage loans) that had been assets of savings and loan associations (S&Ls) declared insolvent by the Office of Thrift Supervision as a consequence of the savings and loan crisis of the 1980s.
It’s time for the Feds to give serious consideration to Resolution Trust Corporation II, or what I have dubbed the Housing Recovery Corporation (“HRCâ€). If they did it in the late 1980s, they can, and must, do it again. As I envision it, the HRC will be a quasi-public entity that will establish Housing Recovery Zones (“HRZâ€) in the hardest hit geographic areas such as the Inland Empire and other urban areas that are suffering most from foreclosures. It’s comparable to the federal government declaring disaster relief areas such as the Gulf States after Katrina. The difference is, this could be a much bigger disaster across the entire country.
Here’s how it works. Once a HRZ is in place, the Housing Recovery Corporation would purchase the debt of distressed, owner-occupied homes from the debt holder at a discount. The HRC would then restructure the debt into a two-part mortgage. The new 1st TD would be a market-rate, performing mortgage that the HRC could sell into the secondary market, and the 2nd TD would be an interest-free, self-amortizing loan based on a contractual agreement with the homeowner and held by the HRC.
It’s a win-win. The homeowners have an economic incentive to stay in their homes; the property values of surrounding properties are not as impacted by foreclosures; the banks and other lenders would have a secondary market for their non-performing mortgages; state and local governments are relieved of the pain of seeing residents kicked out of their houses and rental units (a lot of rentals are homes now in foreclosure with renters standing in the doorway); and the housing market – and ultimately the economy -- are not being pummeled by the tidal wave of foreclosures.
(Berger is a principal XRoads Solutions Group with offices in New York City and Santa Ana, CA. He has extensive experience working with homebuilding and real estate entities, and heads XRoads' newly established Homebuilding Practice.)