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A Proxy Battle Could Catalyze Gains in This Out-of-Favor Stock

Proxy voting is often overlooked by retail investors, but an ongoing proxy battle could help turn the tides for this out-of-favor stock.


Spring is just around the corner, and so is proxy season. Most companies hold their annual shareholder meetings in April and May, and the most important part of these meetings is the election to determine who sits on the board of directors. As shareholders own and control the company, they collectively make this decision through their votes. Almost no one casts votes in person at these meetings, so they vote by absentee ballot (usually online or by paper), called a proxy.

Most proxy votes are routine, with the outcome predetermined. Directors are almost always reelected or replaced by board-approved new candidates. But not always.

If a company’s operating and share price performance is dismal, some shareholders may seek to replace some or all of the board members in an effort to turn around the company and its share price. These dissident shareholders may put forth one or more of their own board candidates, and then seek to persuade enough other shareholders to vote for them in hopes of gaining board seats.

While proxy battles are serious business, they can also be entertaining. Jeff Gramm, a hedge fund manager and value investing professor at Columbia Business School, wrote a book, Dear Chairman: Boardroom Battles and the Rise of Shareholder Activism, that recounts several of the more colorful shareholder efforts to change bad management practices. Each chapter is based on an actual letter written by an activist investor, starting with Benjamin Graham’s comparatively genteel pressure at Northern Pipeline to the highly entertaining letter written by Daniel Loeb to Star Gas wondering whether the CEO’s 78-year-old mom belongs on the Board of Directors.


Are proxy fight stocks worthwhile investments? Possibly. If the stock is out of favor, the company’s problems are fixable by new leadership and the dissidents win, then investors can be amply rewarded. The October 2014 proxy battle by Starboard Value led to the replacement of Darden Restaurants’ (DRI) entire board of directors – a watershed event in corporate governance. As the new leadership turned around the company, the shares went from lackluster to sharply outperforming the market.

More recently, in a closely watched proxy vote showdown in 2021, tiny activist investment firm Engine No. 1 gained three board seats at energy giant ExxonMobil (XOM). While much of the subsequently impressive share price gains were driven by surging energy prices, the rebuke to CEO Darren Woods’ aggressive growth strategy clearly helped.

This year, a new rule from the Securities and Exchange Commission (SEC) may increase the chances for activist investors to succeed in proxy battles. Under the former rule, activists needed to distribute a separate proxy card to shareholders to solicit their votes – a cumbersome, confusing and expensive process. And, many shareholders never received the activists’ alternative proxy card, so they couldn’t vote on the challenger candidates. The new system creates a Universal Proxy Card on which all candidates (from both the company and the activists) are on a single ballot sent by the company. This greatly reduces the cost of proxy battles and allows all shareholders to see all of the candidates in one place. Critically, rather than an all-or-nothing choice, the universal proxy card allows shareholders to mix-n-match their candidates.

Another emerging trend: ETF investors will increasingly get more voting rights. Currently, shares of the underlying companies held in ETFs are voted by sponsors like Blackrock, State Street and Fidelity. But, with these sponsors collectively owning 20% or more of the underlying shares in major public companies, their influence is being challenged. Many shareholders are seeking the right to vote these shares, particularly regarding the ESG policies and disclosures of publicly traded companies. This year, Blackrock and others are allowing major institutional shareholders to vote the underlying shares in ETFs. It is only a matter of time before these rights are extended to all ETF investors.

As proxy battles are public, investors can often learn the details of the activists’ arguments by reading their open letters to shareholders and their lengthy slide presentations. Starboard’s 294-page PowerPoint deck set a high-water mark. It is still available on the internet and worthy of a read by intrepid investors.

Like all turnaround investing, being selective is the key to success. Outcomes of most highly contested campaigns are unpredictable, so our strategy generally avoids pre-vote situations. We may miss some winning stocks in the run-up to the vote, but we avoid the many cases where the shares slide following an unfavorable election outcome. However, if the dissident campaign succeeds, our experience shows that subsequent share price gains can still be strong yet with much lower risk.

A high-profile and entertaining proxy battle now underway is worth a closer look:

A Proxy Battle to “Restore the Magic”

The Walt Disney Company (DIS) While Disney may seem like “The Place Where Dreams Come True,” the last few years have been a nightmare. After an impressive term as CEO, Robert Iger retired in February 2020, leaving Disney in the hands of lieutenant Robert Chapek. Within weeks, the pandemic struck, requiring a prolonged shutdown of the fabled Disney theme parks and producing sharp reductions in other revenues. Over the subsequent two years, Chapek eliminated the dividend, aggressively raised prices at the theme parks, got caught in a political battle and oversaw accelerating losses in the Disney+ streaming service. His most notable achievement appears to have been alienating the company’s customers, employees and shareholders. Disney shares plummeted 55% from their peak and lost all of their price appreciation since 2014.

After undermining Chapek, Iger returned to lead the company in November 2022. But the bad dream continues: the streaming service is facing intense competition and rising costs, the value of the ESPN franchise (and cash cow) is eroding from enduring secular pressure, and inflation is weakening its customers’ ability to spend on Disney attractions.

With the company in disarray, activist Nelson Peltz and his Trian Partners investment fund have launched a colorful proxy battle to win a board seat. Among the notable issues raised by Trian in its 36-page slide deck titled “Restore the Magic” (available here) is that Disney’s current leadership team may be unable to effectively manage its business, board oversight is inadequate and the CEO succession process is broken. Disney responded by moving board member Mark Parker into the independent chair seat.

Peltz has upshifted his efforts for change by undertaking a proxy battle to win a seat on the board of directors.

Does the proxy campaign make Disney shares a worthy value investment day? Our view is that having an activist like Peltz on the board of directors would be good for shareholders. Peltz’s focus on long-term shareholder value and mindset as a truly independent voice unafraid of saying hard truths would bring important clarity to the board. The two-year term awarded to Iger means that a succession plan needs to be launched now, particularly as Iger postponed his original retirement date several times. Disney has a unique franchise across its operations – it needs better oversight than the board as currently configured seems capable of providing. The fixes won’t be completed overnight, and more changes to the board and the executive leadership are needed, but having Peltz on the board is a step in the right direction.

However, while better leadership could readily boost Disney’s earnings, the improvements could take several years to have much of an impact. Further, the valuation is currently high, at 26x earnings and 16x EV/EBITDA, leaving little room for yet higher multiples. If Peltz loses his campaign, the shares could readily lose much of their New Year bounce.

For now, investors will want to watch from the sidelines rather than take a ride on Disney shares.

At the Cabot Turnaround Letter and Cabot Undervalued Stocks Advisor, this is the type of analysis we do every day. Let us help you sort through the market to find the best catalyst-driven stocks.


Bruce Kaser has more than 25 years of value investing experience in managing institutional portfolios, mutual funds and private client accounts. He has led two successful investment platform turnarounds, co-founded an investment management firm, and was principal of a $3 billion (AUM) employee-owned investment management company.