Annual Corporate Governance & Executive Compensation Survey

Shearman & Sterling 32 | Shareholder Activism CONCLUSION It is uncertain what this confluence of thinking by institutional and activist shareholders will mean for companies and their management, but it is probably safe to predict that the pressure that directors and managers feel to deliver value to their shareholders will not lessen. While activist investors may be increasingly required by their institutional counterparts to look beyond a three, six or 12 month horizon, at least some institutional shareholders have clearly signaled that the days of infinite patience, if they ever existed, are over. BlackRock Inc. (BlackRock), State Street Global Advisors (SSGA) and the Vanguard Group (Vanguard), which are the three largest global asset management firms, have been particularly vocal in this regard, stating their willingness to use their influence and vote to protect the long-term value of firms and to encourage companies to prioritize issues relating to board independence and composition, talent development and environmental, social and governance (ESG) issues – all of which they believe are important to maximizing long-term value creation. The CEOs of these institutions have each previously put portfolio company executives on notice that a focus on short-term results can be a barrier to long-term growth. BlackRock CEO Larry Fink's February 1, 2016 letter to chief executives at S&P 500 companies and large European companies urged these companies to "adopt balanced capital plans… that support strategies for long-term growth" and asked that every CEO lay out a strategic framework for long-term value creation each year and communicate that plan to shareholders. In addition, Ronald P. O'Hanley, President and CEO of SSGA and Vice Chairman of State Street Corporation, stated in his February 26, 2016 letter to directors that "short-term performance matters, but it should be assessed in the context of a company's long-term goals." Letters in 2017 from the CEOs of BlackRock and Vanguard intensified this pressure and provided further insight into their engagement strategies and objectives, which continue to highlight the importance of long-term strategies, good corporate governance and ESG issues, including gender diversity on boards and climate change. Blackrock's January 24, 2017, annual letter to CEO's noted that long-term value for clients drives its engagement with companies, but stated that "a long-term approach should not be confused with an infinitely patient one," noting that, if despite ongoing engagement, there is a lack of progress or an insufficient response, "we do not hesitate to exercise our right to vote against incumbent directors or misaligned executive compensation." Vanguard's August 31, 2017, letter to directors stated that a long-term perspective informs every aspect of its investment approach, noting that its 9 See Larry Fink's February 1, 2016, letter to CEOs and Morrow Sodali, Institutional Investor Survey 2017 10 https://trianpartners.com/content/uploads/2017/06/Trian_ESG_Policy_ Statement_-_June_2017.pdf. Trian is also a signatory to the Investor Stewardship Group, a collective of 38 U.S. and international institutional investors investing over $20 trillion in U.S. equity markets, that was formed to establish a framework of basic standards of investment stewardship and corporate governance for U.S. institutional investors and boardroom conduct. index funds are structurally long-term, while its active equity managers are behaviorally long-term. It also stated that, in order to make an informed decision, it engages with both the company and "other investors, including activists and shareholder proponents." In that regard, it is clear that institutional investors are increasingly willing to engage (and vote) with activists, particularly in cases where they perceive poor governance practices, a lack of receptiveness to shareholders' wishes or a lack of engagement with investors. 9 While the focus of activist and institutional shareholders is not aligned across all issues, it is becoming increasingly difficult to find a "passive" shareholder. As SSGA's CEO wrote (in the context of driving greater board independence) in his February 26, 2016 letter to directors, "In the event that companies fail to take action, despite our best efforts to actively engage with them, we will use our proxy voting power to effect change." Interestingly, as institutional investors recognize the need to be less "passive," activists are seeking to shed the perception that they are focused only on short term results. In May 2016, a group of activist investors, including Elliot Management, Icahn Enterprises, Jana Partners and Pershing Square, founded the Council for Investor Rights and Corporate Accountability, describing themselves as a consortium of investors that believe that a well-functioning system of checks and balances between boards and shareholders is fundamental to long term economic growth and U.S. prosperity. In June of this year, Trian Partners published its first policy statement on corporate stewardship, indicating that, among other things, it looks to achieve long-term sustainable earnings growth for the benefit of all shareholders. 10

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