More CEOs Are Learning Who’s the Boss

Big shareholders, long dutiful supporters of management, aren’t keeping quiet anymore | Investors are “increasingly interested in taking fate into their own hands and promoting change”

Alex Nussbaum, Drew Armstrong, and Jeff Green

Former WellPoint CEO Angela Braly left amid pressure from big investors


After WellPoint missed analysts’ earnings estimates for the second time in three quarters this summer and lowered its profit outlook, Royal Capital Management — which owned 837,800 shares, or less than 1 percent of the health insurer — took a step usually reserved for a company’s directors: The New York hedge fund demanded the ouster of Chief Executive Officer Angela Braly.

“She has, it is widely agreed, created a culture in which the financial forecasting process is manifestly dysfunctional, subordinates are openly (and rightly) critical of her performance, and a revolving door of senior management ensures these problems will persist,” Royal partners Robert Medway and John Lancefield wrote in an Aug. 22 letter to WellPoint’s board. “We implore you to take actions to regain investors’ confidence.” Six days later, WellPoint’s directors, who by then had arranged talks with several other dissatisfied investors including Barrow, Hanley, Mewhinney & Strauss and T. Rowe Price, announced Braly’s resignation. The board is now searching for a new CEO.

WellPoint’s investors are among a mounting group of large shareholders who have begun behaving like bosses in boardrooms. From Yahoo! and Chesapeake Energy to AOL and Astra-Zeneca, investor revolts in the past several years have helped oust CEOs and directors, or are forcing them to change strategies. “We’re seeing a radical transformation in corporate control and the relationship between management, directors, and investors,” says Harvard Business School Professor Rakesh Khurana. “It used to be shareholders pushing against boards who were buffering the CEOs. But now investors are telling directors who should be the CEO and how management should run the company.”

Investor pushback can be seen in shareholders’ growing willingness to vote against retention of directors, a process long considered a rubber stamp from investors. In 2006, only 28 directors at public companies in the Russell 3000 Index didn’t receive a majority vote from shareholders, according to Paul Hodgson, chief research analyst at GMI Ratings, which advises large investors on corporate governance. Last year that number was 79. “People lost a lot of money in 2008, and they were really angry about it,” says Hodgson. “They’re not putting up with bad governance.”

Calls for more shareholder power aren’t coming just from so-called activist investors — think Carl Icahn, Bill Ackman, and other financiers who take stakes in companies so they can press for changes. Since the financial crisis, activists are being joined by normally passive investment managers who have long been content to let company managers call the shots. A study of 25 large mutual funds, including BlackRock, Dodge & Cox, and Vanguard, show they increased overall support of shareholder proposals by 33 percent from 2004 through 2012, according to Fund Votes, which tracks their voting habits.

Clinton Group, a New York-based investment company with $2.5 billion under management, won 63 percent of shareholders’ votes to edge out retailer Wet Seal’s chairman and three directors in October. Clinton Group also successfully pushed to get a new director installed at Nutrisystem, the weight-loss company, earlier this year. “Investors have realized that passively investing in a diversified portfolio gets you market returns, and market returns haven’t been great over the preceding three, five, 10 years,” says Greg Taxin, a Clinton Group director. “They’re increasingly interested in taking fate into their own hands and promoting change at companies when they think change is warranted.”

AstraZeneca’s former CEO, David Brennan, stepped down in June amid rising investor discontent over the drugmaker’s performance. At AOL, activist investor Starboard Value didn’t win its bid to install three directors, but took credit for some strategic moves CEO Tim Armstrong made, such as the sale of patents to Microsoft for $1.06 billion. (Armstrong said he was already considering the sale.) Chesapeake named a new chairman and four new directors in June at the insistence of investors, following questions about conflicts of interest on the board.

On a single day in early November, investors who aren’t traditionally activists filed letters proposing changes at SandRidge Energy and at advertising company Digital Generation. Dinakar Singh, CEO of TPG-Axon Capital Management, in a Nov. 8 letter filed with regulators, called for the ouster of SandRidge CEO Tom Ward. The Oklahoma City-based oil and gas company’s stock is down 79 percent since its 2007 IPO. TPG-Axon, which owns 4.69 percent of SandRidge, or 23 million shares, was joined in pressuring for changes at the energy company on Nov. 15 by Mount Kellett Capital Management, which holds 4.5 percent. Mount Kellett, a $7 billion asset manager co-founded by two former Goldman Sachs bankers, said SandRidge should fire Ward and delay a plan to sell reserves until a new management and board are in place. “Most often, we are ‘involved’ shareholders, not ‘activist’ shareholders,” TPG-Axon’s Singh wrote in his letter to the SandRidge board of directors. “However, in instances where we come to believe that management is acting in a manner that is destructive of value, we believe it is important to actively engage.” SandRidge didn’t return a call seeking comment.

Alex Meruelo, president of Meruelo Investment Partners and Digital Generation’s largest investor with about a 9.5 percent stake, said in a letter written on Nov. 8 that he would propose new directors and possibly push for a sale of the company. Meruelo was previously most visible as an unsuccessful bidder to buy the Atlanta Hawks basketball team last year.

At WellPoint, investor frustration grew steadily over several years as the company repeatedly underestimated medical costs and announced it was losing customers. At a meeting in Miami in March attended by WellPoint’s chief financial officer and about 20 of the health insurer’s investors, “there was palpable anger in the room,” says Royal Partners’ Lancefield.

After WellPoint in its second-quarter earnings report on July 25 missed analyst estimates and the stock dropped 12 percent, its biggest one-day slide in four years, the ill will worsened. Fueling investor anger was lead director Jackie Ward’s assertion that the board still supported the management team. Another director, Lenox Baker Jr., also publicly defended Braly, who took charge in 2007. “Angela, I think, has done a great job,” he said in an Aug. 10 interview with Bloomberg News.

By then investors Barrow Hanley, WellPoint’s second-largest stockholder with 17.3 million shares, and T. Rowe Price, the 12th-largest, were seeking meetings with the health insurer’s board and writing letters recommending Braly’s ouster. “We have spoken with numerous other shareholders,” Royal Capital wrote in its letter, “and have been struck by the utter absence of even one person who is pleased with the manner in which Ms. Braly is leading the company.” Braly, reached by phone, declined comment. WellPoint did not respond to phone calls seeking comment.

Mark Giambrone, portfolio manager at Barrow Hanley, thinks a greater willingness by directors and management to listen to activist investors is spurring outspokenness among a broader group of big institutional shareholders. Barrow Hanley, which has more than $60 billion in assets under management, typically is “hesitant to get involved,” he says. “If you find that the people who are agitating are getting results, that’s going to encourage other people to do it.”

The bottom line As big investors press boards, the number of directors who failed to win majorities in shareholder votes has almost tripled since 2006.


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