The shareholders spoke, and they didn’t like what they heard

Posted by Marc Hodak on May 14, 2015 under Governance, Revealed preference | 4 Comments to Read

Those who have followed the Dupont/Trian contest know that the shareholders voted (barely) to retain the incumbent board. But two other, fascinating pieces of information are apparent from the aftermath of that vote regarding the investors’ reaction:

1. The market was surprised

2. The market was disappointed

A seven percent drop in the stock price is huge. Shareholders were clearly invested, so to speak, in seeing Trian win, even as they voted them down. So, while shareholders-as-voters accepted CEO Ellen Kullman’s explanation that Nelson Peltz does not know as well as she what is best for their company, shareholders-as-traders said, “Whoa, that was a terrible decision!” We assume that, being the same people, each making their judgments based on their individual, independent estimation about the future prospects of the company, and with the “wisdom of crowds” sorting out their discordant judgments into a useful, single verdict, we should see less schizoid outcomes.

Alas, this “crowd” effect works via very different mechanisms in proxy voting versus in market pricing. So, which result should management heed?Proxy voting is like a caucus, done in a public forum, and—in certain cases—allowing for the possibility of information cascades that can undermine independent judgment and, hence, ‘crowd wisdom’. Market pricing is strictly between a person and his or her computer screen via a double-auction mechanism. And non-shareholders get a say in pricing, too; thousands of people merely thinking of buying the stock, only now at a lower price because (for example) of the way that current shareholders vote their proxies is how prices can dramatically swing without a single share trading hands.

When it comes to prediction and value, the market mechanism is generally far superior to voting. In Dupont’s case, “the market” clearly, ironically, missed how shareholders were going to vote, and the shareholders clearly, ironically, voted in a manner that destroyed significant value, at least in the short term. We sometimes see that happening with proxy votes on governance structure, but in such cases voting is tainted by the influence of proxy advisors, both by undermining independence of judgment and by providing bad advice.

In this case, though, the proxy advisors turned out to be right in recommending in favor of Trian nominees. This may speak to how much better they are in analyzing special situations than in applying one-size-fits-all standards. Or it might just be saying something about broken clocks. In any case, as Kullman and her team celebrate their victory, they would do well to heed what the market is telling them more than what their shareholders are telling them. The market verdict was much less ambiguous.