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Governance

FSBA: Proxy moves correlated to gains

Chris Cernich believes the FSBA is the first to do this kind of study.

State board finds 9% bump in returns with voting decisions, according to new study

The Florida State Board of Administration's proxy-voting decisions correlated with a 9.4% increase in cumulative returns based on original value of holdings, adding $178 million in appreciation to its assets, according to a pioneering study by the board.

Chris Cernich, managing director and head of mergers and acquisitions and proxy contest research, at Institutional Shareholder Services Inc., Rockville, Md., said of the study: “I believe it is the first of a kind, where an individual fund of any sort looked at its own holdings to see ... the effect of their own vote.”

Michael P. McCauley, FSBA senior officer, investment programs and governance, said in an interview, “We are trying to place a value on the vote. The study results validate our approach, and we believe the quantitative results provide evidence of a sound analytical framework employed by SBA staff in evaluating proxy contests,” Mr. McCauley said in a follow-up e-mail.

“The study suggests that SBA proxy-voting decisions have had significant positive economic effects on portfolio value.”

The internally produced study by the Tallahassee-based FSBA examined all proxy contests from Jan. 1, 2006, through Dec. 31, 2014, at U.S.-domiciled companies with market capitalizations exceeding $100 million.

The FSBA oversees $181.4 billion in total assets, including the Florida Retirement System's $147.5 billion defined benefit plan and $8.8 billion defined contribution plan.

“We"ve always held the belief voting is important and it can impact value,” Mr. McCauley said in the interview. “It's just very hard to quantify that and ... draw the link.”

“The results of the study aren't necessarily causal,” he said. “But there is ... a clear correlation between our voting decisions and the subsequent impact on company performance” and FSBA holdings of the companies subject to proxy contests. It kind of validates our process and decision-making.”

Other major asset owners haven't done such a study of proxy-voting impact on their valuation.

New York Retirement Systems, whose combined assets total $163.4 billion, hasn't done a study of the impact of its proxy-voting decisions on its holdings and has no plans to do so, said Michael Garland, assistant comptroller for corporate governance and responsible investment.

In an e-mail, Mr. Garland wrote: “Our corporate governance initiatives are focused on finding ways to improve the long-term sustainable value of our portfolio companies. We track academic and empirical research that measures the impact of proxy voting and corporate engagement on a broad range of environmental, human capital and corporate governance practices. These studies help to inform both our voting guidelines and shareowner initiatives.”

Mr. Garland serves in the bureau of asset management in the office of Scott M. Stringer, New York City comptroller, who oversees the New York City Retirement Systems.

Analysis, not correlation

California Public Employees' Retirement System, Sacramento, has analyzed the stock performance impact of its engagement efforts to promote better corporate governance at 188 companies it has targeted since 1988. But the $304.5 billion pension fund has not linked the engagement efforts to its proxy-voting decisions or the impact on the valuation of its holdings in the targeted companies, Joe DeAnda, information officer, investment operations, global governance, and supplemental income plans, said in an e-mail.

California State Teachers' Retirement System, West Sacramento, produces a report of its proxy voting, including details on whether it voted in favor or against proposals. But the $193.1 billion pension fund has not correlated its voting with any impact on the value of its equity holdings, Ricardo Duran, information officer-investments, said in an e-mail.

Talking about the Florida study, Mr. Cernich said, “What's most compelling about it is the actual numbers they put up and the evidence that they have been voting very effectively on behalf of their beneficiaries. That's impressive. What's even more impressive is (the FSBA is) taking the time” to evaluate its proxy-voting process and outcomes.

The FSBA's investments across all 107 companies in the study at time of the initial proxy-contest announcement totaled $1.9 billion.

The FSBA's returns from the companies in the study are based on the five years after the initial proxy contest was announced or, for companies with initial proxy contests after 2011, through 2014.

The report — “Valuing the Vote: the Impact of Proxy voting on SBA Holdings: Empirical Analysis of Proxy Contests,” produced by Mr. McCauley and other staff members — includes an examination of four sets of FSBA proxy-voting decisions and resulting outcomes to arrive at its cumulative return by netting the investment gains and losses from the results.

FSBA support for dissident nominees when dissidents won at least one seat resulted in a $51 million total cumulative gain for FSBA holdings, while FSBA support for dissidents when management won all seats resulted in a $259 million loss.

FSBA support for management nominees when dissidents won at least one seat resulted in $249 million gain, while FSBA support for management when management won all the seats resulted in a $137 million gain.

Activist funds excluded

Looking at its proxy-voting decisions, the FSBA gained a cumulative $188 million in initial proxy contests — leaving out subsequent proxy contests by the same company — where the FSBA voted with the side that won. When voting with the side that lost, its holdings lost a cumulative $10 million.

FSBA staff considered examining the impact of the value of its holding in activist funds to which it has allocated, Mr. McCauley said. But “we are in only four activist funds and only one of the four had proxy contests,” he said. “So it just wasn't meaningful” to study.

Mr. Cernich said the FSBA study has “validity for what they were trying to do, which is simply looking at whether their principles and their voting pattern have been in the vested interest of the people for whom they are fiduciaries.”

A study “is certainly the right thing for a fiduciary to undertake,” Mr. Cernich said.

The FSBA's four scenarios and $178 million gain include only the initial proxy contest of the companies in the study. Eight companies in the study had more than one proxy contest during the nine-year period examined. When the study includes all those proxy contests, the FSBA proxy-voting decisions correlated with a 30% cumulative increase in returns based on the original value of the holding, adding $572 million in appreciation from initial contest to five years after the last contest or through 2014.

Among those eight companies, Biogen Idec Inc., which had two proxy contests during the study period, had the biggest single impact, gain or loss, on FSBA's value when its two proxy contests are included, having a $610 million cumulative gain for the FSBA.

"What's the impact'

Describing the FSBA purpose for its study, Mr. McCauley said, “We wanted first and foremost to look at our own voting and say, "OK, we have this analytical process we deploy really across the board on all proxy voting but specifically for (proxy contests) where it involved the potential to change control (and have) a very significant or material impact on a company's operations. ... What's the impact of that related to how we voted. Are we actually supporting the right parties in this decision-making process?”

As a result of the study's validation of the FSBA's process, Mr. McCauley said in the e-mail, “We'll hold our current approach constant, but may look to increase the time and effort devoted to analyzing such contested votes in order to recognize the potential value creation. ... We are aware, however, that the market environment, and activist investing in particular, is not static. We know we'll have to evolve our analytical framework to keep pace with potential increasing pressure from activist investors, new regulations, disclosure requirements, and other factors that may develop in the future.” n

This article originally appeared in the July 13, 2015 print issue as, "FSBA: Proxy moves correlated to gains".