March 18, 2008
The Power of the Proxy
Posted by Lisa Fairfax

The New York Times Company announced that it has struck a deal to nominate two insurgent candidates to its board.  The candidates were backed by two hedge funds--Harbringer Capital Partners and Firebrand Partners--that now hold some 19% of the company's outstanding stock, making them the largest non-family shareholders at the company.  The agreement to nominate the two candidates came as a result of Harbringer and Firebrands' threatened proxy fight in which they were aiming to capture four board seats at the company's annual shareholders' meeting in April.  Harbringer and Firebrand agreed to call off the proxy fight in exchange for the two seats.  While it is not clear what kind of impact the two new members will have, the company's agreement to such a deal underscores the powerful impact, not only of proxy fights, but also of the realistic ability to wage such fights.

Of course the funds' ability to broker such a deal once again raises questions about the benefits of shareholder activism in general and hedge fund activism in particular.  Moreover, it raises questions about shareholders' role in the corporation as well as the appropriate level of influence any single shareholder should have over the corporation.

To be sure, it is not clear what kind of role or impact these new members will have at the company.  Indeed, Harbringer and Firebrand  wanted the new directors to replace sitting directors.  Instead, the company expanded the board from 13 to 15.  Then too, the New York Times Co. has a dual class structure which ensures that family members elect 10 out of the 15 directors, while public shareholders elect the remaining 5 members of the board.  Hence, it is unclear how much influence one can expect these two members to wield.  Of course, sometimes all it takes is a seat at the table to shake things up.

However, leaving aside for a moment whether this deal will prove beneficial or have any significant impact on future corporate policy, this deal does underscore the power of the proxy fight as compared to other measures aimed at influencing director composition. Indeed, some suggest that withhold the vote campaigns can be just as powerful as the ability to wage a proxy fight.  Yet, two years ago shareholders withheld 30% of their vote from directors and last year shareholders withheld 42% of their vote from directors.  While these votes appeared to have triggered some changes at the company, they did not prompt the company to alter its board.  Then too, some companies insist that shareholders' ability to recommend candidates to the nominating committee is an adequate substitute for proxy campaigns.  In this case, however, Harbringer and Firebrand complained that the New York Times Co. refused to interview any of their nominees.  It was not until the real threat of a proxy fight emerged that the New York Times Co. capitulated.  That capitulation suggests that these alternative measures pale in comparison to the power inherent in a proxy fight--or in this case the power inherent in the legitimate threat of a proxy fight.   

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