The Boardroom November 17, 2009, 11:44AM EST

Proxy Contests and Shareholder Slates

Bev Behan asks former CalPERS governance chief and current Shamrock Capital Advisors exec Dennis Johnson how he chooses boards to target and what to consider if you're asked to join a shareholder slate

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Earlier this year, Delaware adopted new legislation making it easier for shareholders to put forward nominees for a company's board of directors. The Securities and Exchange Commission (SEC) proposed similar changes to the federal proxy rules. Under the SEC proposals, shareholders holding 1% or more of companies with a global market value of at least $700 million could have the names of their board nominees included in the company’s proxy circular. Similar provisions would apply to shareholders holding at least 3% of midsized companies and 5% of smaller companies.

The SEC delayed its vote from this November to early 2010 to wade through hundreds of comments received on both sides of the issue.

To learn more about how investors target companies, select board candidates, and what questions you should ask if you're invited to serve on a shareholder slate, BusinessWeek columnist Beverly Behan spoke with Dennis Johnson. A veteran of numerous contested board elections as the former head of governance at CalPERS, Johnson is now a managing director at Shamrock Capital Advisors and managing director of the Shamrock Activist Value Fund. Shamrock recently waged a successful campaign to get three seats on the nine-member board of Texas Industries (TXI). Edited excerpts of their conversation follow:

What are some of the things that you look at when you make a decision to wage a proxy contest to get some of your own nominees onto a company's board?

First and foremost, we look at the performance of the company over a sustained period of time and relative to that company's peers. When we see a situation where performance is lagging, and we don't see adjustments being made to address business-performance issues, this suggests to us that the board may not be doing its job in terms of appropriate oversight.

We look at the governance practices of the company. Are there consistent practices that suggest entrenchment of the board and management such as a poison pill, a staggered board? Do we have a situation where the former CEO has been serving for a lengthy period as chair?

Then we look at the profiles of the board members. For example, in the case of one company whose board we are engaged with now, none of its independent directors have any industry experience, and none had experience in corporate finance. This is critical on that particular board because its business requires significant capital investment, and the company wasn't earning its cost of capital.

We also look at the tenure of the board members. This isn't to say that having someone who has served on a board for a long time is necessarily a bad thing. But if you've got a number of people who have been on that board for decades, that can be indicative of a problem.

What do you look for in candidates when you are recruiting for your slate in a proxy contest?

The most important factor is integrity. We also look for a demonstrated history of good business judgment. When you review the individual's track record, you should see a consistent pattern of good business decision-making throughout his or her career.

Finally, I look for the specific experience, skills, and capabilities required to address some of the weaknesses we've identified in the board's composition. I also want to be certain the individual can make the time commitment required to be effective as a director in terms of other board commitments.

What should a prospective candidate ask before deciding whether to serve on an activist slate?

First you need to do the same type of due diligence that you would if you had been invited to serve on a board by the Nominating Committee—review the financial performance, the bios of board members and company executives, recent developments, key competitors, governance policies, etc.