Proxy Fights and Robot Recruiting

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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Proxy fights: Good or bad?

One funny aspect of American shareholder democracy is that normally only the board of directors nominates candidates for the board of directors. So you can either vote for the current board to stay in office, or you can not do that, but you can't vote for anyone else. And even if almost everyone votes against the incumbent directors, they generally stay on; they're just a little embarrassed about it. If you want to actually remove the directors and appoint new ones, you need to run a proxy fight, which is an expensive and time-consuming process. To some people this seems like an odd state of affairs -- I mean, it is odd, but to some people it seems bad -- so there is a growing movement for "proxy access," in which, say, shareholders would be allowed, on the company's own proxy statement, "to nominate directors as long as they have held a stake of at least 3 percent for three years or more."

New York City Comptroller Scott Stringer is pushing this plan pretty hard at a bunch of companies, and here is Gretchen Morgenson backing him up. Morgenson criticizes Vanguard and Fidelity for not (usually) backing proxy access proposals, arguing that they "are preserving the status quo in corporate boardrooms, where there is little accountability on outsize executive pay, director diversity and other governance issues" and breaching their fiduciary duty to their investors. Maybe? At this point proxy access is mostly symbolic -- I've never heard of anyone actually being elected to a board via proxy access -- and the idea that boards would function better with one or two disgruntled protest directors seems untested and a bit odd. 

On the other hand, here is John Coffee writing about DuPont's narrow victory in its proxy fight against Trian:

One answer has to be that the governance professionals at pension funds and mutual funds now favor (or at least are open to) the idea of a divided, factionalized board. Putting Nelson Petz on DuPont’s board struck many of them as a low-cost means, with little downside risk, of keeping DuPont “in play” and signaling the shareholders’ desire for more spinoffs and less investment in long-term capital projects, including research and development. 

So having one or two disgruntled protest directors is appealing to investors -- because it reminds the board that shareholders are watching angrily and want capital return.

Coffee is also interesting on hedge fund "wolf packs" and material nonpublic information:

The key advantage of joining a “wolf pack” is that it offers near riskless profit. The hedge fund leading the pack can tip its allies of its intent to initiate an activist campaign because it is breaching no fiduciary duty in doing so (and is rather helping its own cause); thus, insider trading rules do not prohibit tipping material information in this context. If one can legally exploit material, non-public information, riskless profits are obtainable, and riskless profits will draw a crowd on Wall Street.

"Riskless" is maybe a bit strong but this is basically right! Activist funds can tip other hedge fund investors about upcoming activist campaigns, trading valuable inside information for sympathetic votes. Remember: Sometimes it is legal to trade on material nonpublic information, although, paradoxically, this is not legal advice.

Elsewhere in governance, on Friday the Wall Street Journal endorsed Jamie Dimon's criticism of shareholders who lazily follow the voting recommendations of Institutional Shareholder Services and Glass Lewis, and Nicholas Donatiello and Harvey Pitt argued that the Securities and Exchange Commission should regulate proxy voting to reduce the influence, and conflicts of interest, of ISS and Glass Lewis.

What's Uber doing with its money?

I have been a little puzzled about why Uber has been doing new billion-dollar funding rounds every two weeks, but I guess now we know why. Apparently it's been hiring all the robot scientists from Carnegie Mellon's National Robotics Engineering Center:

Uber took six principal investigators and 34 engineers. The talent included NREC’s director, Tony Stentz, and most of the key program directors. Before Uber’s recruiting, NREC had more than 100 engineers and scientists developing technology for companies and the U.S. military.

Three points here. First: "In February, Carnegie Mellon and Uber trumpeted a strategic partnership in which the school would 'work closely' with the ride-hailing service to develop driverless-car technology," so the lesson is, probably don't get involved in a strategic partnership with Uber. Second: Look, I mean, you may hate surge pricing, but Uber does seem to be reallocating societal resources away from creating robots of death and toward creating self-driving cars, which seems like a nice trade. The price system: Sometimes it's good.

Third, though, consider Uber's model. Uber makes its money -- apparently quite a lot of it -- by connecting drivers and passengers via a smartphone app and collecting a cut of the fare. It spends most of that money on, as far as I can tell, lobbying to be able to operate in different cities. And then, on the back of having (1) a smartphone app and (2) an aggressive lobbying business, it goes out and raises billions and billions and billions of dollars from investors to hire robot engineers to build self-driving cars. Neither the app nor the lobbying seems to have much to do with building a self-driving car. Why should investors give Uber billions of dollars to do something totally outside of its proven area of expertise? Is this a private-market-bubble story? Is it a fundraising arbitrage story, in which Uber raises money like a hot startup and then uses that money as essentially an internal venture capital fund? Is it a story of public companies that are so battered by market demands for buybacks that they can't invest in really cool research like self-driving cars, leaving the market open to private companies who can? (Isn't Google building self-driving cars?) Is it an idiosyncratic story of Uber actually having expertise in more than one area

Elsewhere: "Snapchat Said to Be Valued at $16 Billion in New Fundraising," and "George Zimmer Starts an 'Uber for Tailors.'"

The China index.

So this is a big deal:

On June 9, MSCI Inc., the New York firm whose MSCI Emerging Markets Index is the most widely tracked benchmark of share-price performance outside the developed world, will disclose whether it plans to add mainland Chinese stocks to the index over the coming year.

One popular criticism of market-cap-weighted stock-market indexes is that they reinforce overvaluation, and if you are worried about occasional oddities in Chinese stocks -- stocks that go up by their daily limit every day for weeks after they go public, for instance -- then adding those stocks to international indexes at this particular point in the valuation cycle might worry you. More to the point: If your thesis is that the Chinese stock market is in a bubble, then a necessary component of that thesis is that investors are hoping to sell at a higher price to a greater fool. (That's what a bubble is.) Investors who track emerging-market indexes, and who will eventually be forced to buy mainland stocks with no sensitivity to valuation, are good candidates to be that greater fool.

Elsewhere, "A profitable Chinese duck processing company has tipped into default after banks refused to roll over loans, making it a rare moneymaking victim of lenders’ wariness as China’s economy slows."

It's Monday, so Greece.

"As another of the government’s self-imposed deadlines for securing a deal slipped away, disagreements between the two sides on budget targets persisted," is another one of those sentences about the Greek crisis that could have been written almost any Monday over the past few months, and that you'll probably read again next Monday. So look forward to that. "The Greek government would do well to act quickly because it is five to midnight for the Greek banks," says a European Central Bank official, but time in this metaphor moves like in Zeno's paradox, and you'll be hearing the same warnings again at two and a half minutes to midnight, one and a quarter, etc., down to five nanoseconds to midnight. Or not, I don't know, but here is Hans-Werner Sinn arguing that Greece's tactics make sense: 

The Greek government is driving up the costs of Plan B for the other side, by allowing capital flight by its citizens. If it so chose, the government could contain this trend with a more conciliatory approach, or stop it outright with the introduction of capital controls. But doing so would weaken its negotiating position, and that is not an option.

Capital flight does not mean that capital is moving abroad in net terms, but rather that private capital is being turned into public capital.

The idea is that deposit flight from Greek banks means that Greek citizens move their money abroad, where it is safe from Grexit, while Greek banks become more and more funded by the other eurozone central banks, leaving those banks to be the losers if Greece leaves the euro. Here is Alexis Tsipras in Le Monde, and more highlights at the Financial Times. What Would Greek Capital Controls Look Like? And Ukraine debt restructuring talks will be held in London this week.

Things happen.

People are worried about bond market liquidity. The U.K. government will sell more Lloyds shares. Who's making money on the Charter/Time Warner deal? WaMu is fighting over golden parachutes. Skadden is fighting over contract-attorney overtime. Gross’s Terminal Keyboard to Be Displayed at Smithsonian. Aubrey McClendon keeps doing controversial energy deals. Dick Fuld is trying to sell his Sun Valley house. Banks are not intermediaries of loanable funds — and why this matters. Bank Brands Need to Make Their Own 'Finding Nemo.' Millennials Are Destroying Banks, And It’s The Banks’ Fault. Fake jobs. Computerized pants

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Matt Levine at

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