The Selective Corporate Definition Of ‘Long-Term’ When A Shareholder Activist Shows Up

Given how cynically some companies use the prefix “long-term” when seeking to defend their track records (e.g., some permutation of “Even though our operating results and stock price performance have been unsatisfactory, our company and its board of directors remain focused on delivering long-term value”), it would be helpful to understand how these companies actually define “long-term” and whether such definition takes into consideration the time that has already been spent by the companies’ directors in their quest to deliver long-term value. More often than not, when an activist shows up, a company conveniently ignores that its board has usually been in place for quite some time, and that the directors on such boards have been (richly) compensated along the way. Indeed, many directors have been on the board for a period of time already approaching the “long-term” according to most conventional definitions, unless one defines “long-term” using a geologic time scale.

According to the 2022 U.S. Spencer Stuart Board Index, the average tenure of a director on the board of an S&P 500 company was approximately 7.8 years and the average annual total compensation of such board member was about $316,000 (Note: This is for attending an average of about eight board meetings a year, making the phrase “Nice work if you can get it” somewhat apt when describing public company board service.) Keeping this average compensation flat would suggest that a hypothetical director serving an average tenure of 7.8 years would receive almost $2.5 million in aggregate compensation over such tenure. Contrast this with the stock price performance of companies that have typically drawn the attention of shareholder activists. Activists often invest in companies whose stock price has underperformed and there have been numerous situations where shareholders of public companies targeted by activists have witnessed significant underperformance over many years before an activist has shown up, while the directors of such companies have reaped rich rewards along the way.

And yet, when a shareholder activist appears, companies often engage in Olympics-level financial gymnastics as they seek to explain why they have underperformed and why such underperformance will be rectified, if only the existing directors were given more time. Quite often, in these contortions of financial metrics, companies will seek to present their stock price performance in the most favorable light by cherry-picking a time frame and/or peer group against which to measure such performance. Often absent from this presentation, however, is data that would be much more meaningful in terms of assessing whether certain directors are worthy to remain on the company’s board, namely the aggregate compensation received by each board member over their tenure compared to the returns witnessed by shareholders who have invested real dollars in such company’s stock.

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It is illustrative to use three examples of companies in the S&P 500 that have been the target of shareholder activists in the last several months, namely The Colgate-Palmolive
CL
Company (“Colgate-Palmolive”), The Walt Disney
DIS
Company (“Disney”), and Illumina
ILMN
, Inc. (“Illumina”), in order to understand the preceding. Using data from Bloomberg, the approximate 5-year stock price performance of each company prior to the date an activist was noted by Bloomberg to “start” its activist campaign efforts was: -3.8% for Colgate-Palmolive ($74.96 on 10/17/17 versus $72.14 on 10/17/22, the day before Third Point LLC was noted to have started its efforts); -11.3% for Disney ($103.44 on 11/18/17 versus $91.80 on 11/18/22, the trading day before Trian Fund Management, L.P. was noted to have started its efforts); and -22.4% for Illumina ($250.12 on 3/10/18 versus $194.01 on 3/10/23, the trading day before Icahn Capital LP was noted to have started its efforts.)

Now compare this negative stock price performance with the aggregate compensation received by all the board members who were continuously serving on these companies’ boards over such 5-year periods. Using data compiled from Bloomberg and proxy statements filed with the SEC for the five fiscal years ending with the available data from the last fiscal year prior to the deemed activist “start” date, and adding up the absolute compensation figures cited in the proxy statements for each fiscal year, it appears that: Colgate-Palmolive had six board members who served continuously between fiscal 2017 and fiscal 2021, and those board members collectively received approximately $9.0 million in aggregate compensation; Disney had six board members who served continuously between some portion of fiscal 2018 and fiscal 2022, and those board members collectively received approximately $10.5 million in aggregate compensation; and Illumina had seven board members who served continuously between fiscal 2018 and fiscal 2022, and those board members collectively received approximately $13.7 million in aggregate compensation. So, while these directors had already served on the board for a long time and had been paid handsomely along the way, the shareholders had not fared nearly as well.

It is highly ironic, then, when an activist shows up in situations similar to those presented above and boards of directors cynically wield their concern for the “long-term” like a club against the activist, while quite frequently also claiming that the activist is merely “short-term” oriented. Indeed, companies often play the “long-term” card as they seek to persuade other shareholders and proxy advisory firms that their currently serving directors are more worthy to serve on the board than directors proposed by activists, yet seem to forget that such existing directors have already been there for quite a while. If granted license to repurpose the famous quotation attributed to Samuel Johnson, “Patriotism is the last refuge of a scoundrel,” to be more applicable in a public market context, it would read, “Enthusiasm for the long-term is the last refuge of a cynical board,” especially when such board has already amassed millions of dollars of compensation presiding over a stagnating, or negative, stock price.

Shareholders of all shapes and sizes, as well as the corporate governance and investor stewardship solutions providers such as Institutional Shareholder Services (ISS) and Glass Lewis who provide voting recommendations, should not be swayed by the cynical hymns to the “long-term” sung by directors who have already received significant amounts of money over an extended period of time while failing to deliver value to shareholders. Objectively, it begs the question of how one could justify voting for an incumbent director who has presided over an extended period of underperformance, particularly if other qualified directors proposed by shareholder activists are also up for election.