Allison Wyderka is the Head of Product and Research for Proxy Services, and Wickham Egan is the Director of Business Development and Operations, at Egan-Jones Ratings Company. This post is based on their Egan-Jones memorandum.
I. Facing the Visigoths
“We need to push the barbarians back from the city gates!”
-Ted Forstmann, referencing the 1988 takeover of RJR Nabisco
Those involved in the hostile takeovers of the 1980’s were fighting for their livelihoods. As a result, they used the strongest possible terms to describe their opposition in an effort to fend them off. Though many corporate boards failed to fend off takeovers, new practices were established to stymie future hostile efforts.
Staggered elections of directors became one popular practice. Because only a third of directors might be up for election in a given year, it would take three years to turn over all directors. This made hostile takeovers less attractive because raiders could not take control of the company in one fell swoop. Thus, staggered elections became “best practice.”
However, in the early 2000s, annual elections began to gain favor with proxy services firms. The argument is that shareholders ought to have more immediate control over the company. While supporters of this change in “best practice” might argue that other takeover defense practices have been established, such as the poison pill, adoption of these practices has been limited.
Regardless, it is right to acknowledge that the “best practice” has changed and will likely continue to do so. Perhaps these popular governance practices are better termed “market standard” since:
- Standards regularly evolve, and
- One size does not fit all, as we have previously argued in the case of director tenure. What is best for one company may not be the best for another.
