Employee stock fund shares are typically a reliable source of ammunition when companies need votes to fend off aggressive activists like Ackman, proxy analysts said. Collectively, workers can accumulate large amounts of company shares in retirement accounts.
ADP Inc’s decision in 2015 to liquidate an employee stock fund with nearly 5 million company shares could undermine the payroll processor’s efforts to defeat hedge fund manager William Ackman in a bitter proxy battle.
Last month, Procter Gamble Co declared victory in putting down activist investor Nelson Peltz’s bid to join the board of the consumer products giant. A preliminary vote count indicated Peltz lost by a narrow margin in a vote influenced by PG employee retirement plans. Two of PG’s largest plans held an estimated $16 billion in company shares, according to U.S. regulatory disclosures.
Peltz actively courted those employee votes, given the size of the electorate. But management usually has the advantage when shares held by employees are voted in a proxy battle, said Bruce Goldfarb, chief executive officer of Okapi Partners LLC, a New York-based proxy solicitor.
“Current employees tend to support management, especially if the employees do not think voting will be confidential”, Goldfarb said, speaking in general terms. A PG spokesman said management cannot see how employees voted.
Also, employees often are wary of activist investors who advocate restructuring or strategies that might threaten jobs.
Company shares in the employee stock fund, which had accounted for nearly 1 percent of outstanding shares in Automatic Data Processing Inc, were liquidated in August 2015. This broke up a voting bloc that may have opposed Ackman. ADP declined to comment about how that move could affect the proxy battle.
“If those employee shares are voted for management, that would have been a problem for us”, said Ackman, founder of the $10 billion Pershing Square Capital Management hedge fund.
Ackman is fighting to gain three seats on ADP’s 10-member board. The vote, set for Tuesday, is expected to be close, according to proxy analysts.
Carl Hagberg, an inspector of corporate elections, said a company could come to regret a decision to scrap its plan if the loss of management-friendly shares tips an election in favor of activists.
In the case of ADP, for example, he said, “If they lose by less than 1 percent they would say, ‘Gee, I could have had that 1 percent in the bag.’”
ADP shares had become one of the largest holdings in the company’s $3 billion-plus 401(k) plan, according to disclosures with the U.S. Department of Labor. This raised the threat that employees could one day sue the company if the stock price ever tanked, charging that ADP should have taken better care of their interests.
“Although the ADP Stock Fund had been a popular choice for certain 401(k) participants, it did not align with the plan’s overall investment philosophy, one aspect of which is to promote a diversified portfolio”, an ADP spokeswoman said.
Lucky for activists, ADP is not the only company to liquidate funds holding company stock in 401(k) plans. Corporate America has moved to diversify workers’ investment holdings since Enron collapsed in 2001, and its employees not only lost their jobs but also much of their savings because their retirement plans were dominated by company shares.
About 38.5 percent of U.S. defined contribution retirement plans hold company stock now, down sharply from nearly 50 percent in 2009, according to a 2017 survey by investment consultant adviser Callan.
Brad Allen, founder of Branav, a shareholder risk management advisory firm for company boards, said the close vote at PG has put a spotlight on stock held in employee retirement plans. Not too long ago these plans were an afterthought for proxy voting, he said.
Allen said activists now carefully scrutinize management-influenced shares when they are calculating the odds of success in a proxy fight, including ones in 401(k) plans.
“It’s unlikely companies will have second thoughts on liquidating these positions, since the benefit of employee choice for investment and reduced fiduciary liability outweigh the usage of these plans as a defensive voting tactic”, Allen said.
“But if the ADP vote is under 1 percent spread in Ackman’s favor, some companies may make tactical delays in implementing these liquidations to first hopefully ensure they don’t have a potential activist on their radar.”
