Hedge funds to lead charge

Date: Tuesday, November 4, 2008
Author: Kevin G. DeMarrais, North Jersey.com

Shareholder activism is likely to increase in the months ahead, and much of that activity could be centered on a Lyndhurst-based company that specializes in proxy solicitations, corporate governance and bankruptcy services.

The focus will be on executive compensation and boards of directors, with hedge funds leading the challenges to corporate America, said Paul Schulman, executive managing director of The Altman Group.

Last year was the busiest year for proxy contests, "maybe ever," Schulman said. But the upcoming season is likely to be even busier, when you combine normal activism by good governance groups with the rising involvement of hedge funds.

"Both are looking to create value in their portfolios, but hedge funds get more involved," he said.

That's good news for The Altman Group, which has the capability to make up to 60,000 calls a day from the 250-seat call center on Wall Street West in Lyndhurst.

Altman works on behalf of either the company or its shareholders. Recent solicitations were made on behalf of dissident shareholder groups at Hewlett Packard and Home Depot.

Shareholder groups, such as public pension funds, have traditionally focused on governance, transparency and executive compensation issues, he said. In an era of falling earnings and rising golden parachutes, "they're going to pick up steam, so it's going to be a lot tougher to fight them."

They're pushing to create a more realistic way executive pay is given out, said Gary Brouse, director of policy at the Interfaith Center on Corporate Responsibility in New York.

Many of the proposals his organization backs are non-binding, but they serve as a barometer of where shareholders stand on an issue while educating other shareholders on key issues, he said.

"People are concerned about their pension funds and investments linked to them," Brouse said. "With the financial crisis going on now, everyone is watching."

That's why "this is going to be a very, very active shareholder season," he said.

Leading the way will be hedge funds, and they are expected to be even more aggressive than the good-governance groups, Schulman said.

They "get involved in a company's strategic direction, maybe even management, pushing a company to close down facilities, to restructure the company," he said.

"Hedge fund managers are paid very heavily on results, on performance," Schulman said.

"They get a big percentage of profits they generate for their clients, so a lot of them are turning increasingly to activism to boost performance."

Prime targets will be banks and other financial institutions that were hurt by the credit crisis and the nation's economic meltdown while executives were given large compensation packages.

"I am sure large shareholders or shareholder groups will be asking tough questions of directors and their oversight of the institution's risk exposure and protection in their lending practices," he said.

One tactic expected to grow in popularity will be campaigns to withhold votes for directors, especially those on compensation committees, he said.

Withholding ballots doesn't block a director's election, but it can put pressure on the board to change its practices or for the targeted director to step down, he said.

In addition, some funds are expected to challenge the board by putting up candidates for one or two seats, or even for control of the entire board, he said.

While the funds are pushing to increase shareholder value, there is a question on their agendas, Brouse said, emphasizing that he was speaking personally, and not on behalf of his organization.

"I don't think their interest is always in good governance," he said.

"Some are motivated by self-interest. Institutional investors are in there for the long haul. We're going to be there with the company in thick and thin, so we're very interested in having good governance practices and fiscal responsibility. I'm not sure all hedge funds do that."

E-mail: demarrais@northjersey.com