How Tech Companies Should Position for Shareholders, Part II

Yesterday I mentioned a conversation with friend and colleague, Chicago-based Ann Logue -- a former financial industry analyst who these days writes and teaches about finance and is the author of Socially Responsible Investing for Dummies (Wiley 2009). The financial services meltdown and resulting shareholder disgust has turned into a market equivalent of psychological transference, where the dour mood of investors can expand like a cloud to other industries. This is having a number of results that have to be of interest to an industry where stock price is so important for acquisition and compensation:

• Executive compensation becomes a huge topic -- recently we saw Microsoft's board trying to get ahead of the issue through a non-binding say-on-pay initiative.
• Claw backs could be bad. "You're only so good as your next idea," Ann says. "The claw back provisions make sense in the idea that if you're getting paid now and it turns out that your decision were fraudulent, based on false information, or just really bad ideas, maybe shareholders shouldn't have to pay for them." Expect increased pressure to document decisions about compensation and strategic direction in proxy statements. The danger is that tech is often in a boom-and-bust atmosphere. Cyclical down times could seem like screw-ups in technology and drive investors into a frenzy, so smart communication is key.
• Look out for the fury -- and shrunken portfolios -- of state pension funds. "Those institutions are going to be fighting for every dollar they can get," Ann says. "I would venture that most states are looking at looming deficits in their employee pension plans. Their choices are increase taxes; cut benefits to employees, which will be difficult because they are contractually agreed to; or figure out how to get [money] back on the investment side." Many pension funds have run to shareholder activism to boost returns. That is only going to increase. "It's like because they got burned on AIG, they're going to become really aggressive with Cisco. They're going to transfer their anger to the companies still in business," she adds. Again, if you're in a boom-and-bust industry, spotless disclosure is going to be key.
• Similarly, pay attention to the other institutional investors. "What happens if the Alaska Permanent Fund or the Bill and Melinda Gates Foundation or Harvard university gets involved [with some ethical or governance issue]? There are a handful of really big funds that aren't using their powers. What if they do get aggressive?"
• Brace yourself for the student protests. Campus activists are going directly to the endowment managers and saying, "We're not going to ask you to divest, because we know you have restrictions on what you can and should do. What we want in exchange is for you to push in the proxy process issues that are important to us." Guess what? Many of the managers will, because it keeps peace at home, doesn't unnecessarily disturb returns, and doesn't really put them out, either. "It's usually an organized group and often done in association with the economics or finance department working with the student government," says Ann. "The idea is to have students research the issues and make recommendations for how shareholder proposals should be voted, maybe how pay packages should be voted. This could change the nature of some proxy voting."