A new study prepared by Manifest’s US partner, PROXY Governance with sponsorship by the IRRC Institute, “Effectiveness of Hybrid Boards,” analyzes 120 “hybrid boards” formed from 2005 through 2008 to evaluate their effectiveness in two areas: changes in business strategy and corporate governance structures; and changes in shareholder value measured both absolutely and relative to peers. Hybrid boards are those formed when activist shareholders – such as hedge funds – elect dissident directors but do not win full control of a board via actual or threatened proxy contests.  The study has particular relevance to the current debate in the US over proxy access that is the subject of federal legislation and an SEC proposed rule.

“Hybrid boards represent an increasingly important phenomenon on the corporate governance landscape but are under-studied in the governance literature,” said Scott Fenn, senior managing director for policy at PROXY Governance and a co-author of the report. “Evidence about the degree of effectiveness of these boards is crucial as Congress and regulators consider governance reforms such as proxy access in the nomination of directors, and as institutional investors demonstrate greater willingness to support dissident nominees” Fenn said.

Key Findings

The key research findings are as follows:

  • Shareholder value on average at ongoing companies improved under hybrid boards by 19.1% – 16.6 percentage points more than peers – from the contest period through the board’s one year anniversary. More than half of that gain came during the three-month contest period: average share prices increased by 5.0% over the ensuing year, which is 3.6 percentage points better than peers.
  • Strong positive share price performance over the 15 months from the contest period through the hybrid board’s first anniversary was increasingly likely when the dissidents owned a significant percentage of shares. When dissidents owned between 10% and 25% of shares, performance significantly outperformed peers by an average of 67.7 percentage points. In comparison, dissidents that held less than 5% of shares performed in line with peers, and dissidents that held 5% to 10% of shares moderately outperformed peers.
  • Among the ongoing businesses evaluated following the creation of hybrid boards, total share price performance for the 39 months from the three month contest period through the three year anniversary of the hybrid board, averaged 21.5% – 17.8 percentage points higher than peers – largely on significant contest period price appreciation averaging 10.1%. Over the 36-month period after the contest period, however, share price performance, averaged 0.7% or 6.6 percentage points worse than peers.
  • Shareholder activists have gained increased representation on the boards of targeted companies. During the four-year period covered by the study, dissidents were able to gain representation at some 75% of the companies targeted. Dissidents typically gained board seats through settlement agreements rather than an actual proxy contest brought to a shareholder vote.
  • Bankruptcy was not an objective of any dissident groups in the study but was the outcome under 5% of hybrid boards in the sample. This resulted in a loss of more than 99.9% of shareholder value at those companies.
  • While 35% of hybrid boards were formed by dissidents intending to sell the company, only 15% of this group announced or completed a sale transaction by January 2009.
  • Most of the companies examined continued as ongoing businesses, but 18% were sold during the study period. Among those sold, the sale price premium averaged 27.1% versus the undisturbed share price.
  • Hybrid board characteristics that were most strongly associated with relative shareholder return outperformance compared to peers included companies in which: dissidents owned between 10% and 25% of the firm equity; new dissident and independent directors comprised between 20% and 30% of the target firm’s board; hybrid boards were formed as a result of multiple hedge funds acting as a group to run a proxy contest.

For full details please download the report from the links below.


Hybrid Boards >>

IRRCi >>

Last Updated: 29 May 2009
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