The 2023 proxy season was a relatively successful one for activist investors, who won at least one board seat in at least 35% of proxy contests worldwide. In the U.S., the advent of the universal proxy was at least one factor in activists winning six out of 10 proxy contests since the rules went into effect.

Against that backdrop, Insightia looks at some of this year’s fights to understand why investors chose to back dissidents over incumbent boards.

While incumbent boards and management teams won their fair share of proxy contests this year, an upsurge of activist victories provides an opportunity to understand some of the things that can put a defense at an insuperable disadvantage.

Illumina

Back in April, Insightia suggested four factors that conspired to put Illumina in the crosshairs of Carl Icahn: short-term but easily attributable stock price jitters, M&A risks, compensation, and the judgment of former executives. Yet the San Diego, California-based company wouldn’t have opened itself up to a proxy fight had it not closed an acquisition that regulators were poised to condemn.

According to proxy voting advisor Glass Lewis: “[W]e believe the most fundamental position forwarded by the dissident — that the high-risk, functionally unprecedented closure of the Grail transaction has been a costly, distracting, value-crimping millstone on the company’s already shaky performance and shareholder returns — is persuasive here.”

It didn’t help matters that “the board appears decidedly and disconcertingly disinclined to accept any clear responsibility,” instead blaming the regulators and paying its CEO what Glass Lewis deemed “substantially misaligned compensation.”

Masimo

Medical technology company Masimo saw its shares halve in February 2022 when it announced plans to acquire a commercial speaker business. Six months later, Politan Capital revealed an 8.4% stake.

Yet a situation most observers expected to end in a quiet settlement developed into one of the most bad-tempered proxy fights of 2023. In response to Politan’s private outreach, the company adopted new bylaws that would require an activist to disclose all of its limited partners and planned activist projects – tantamount to making the business model unworkable. Politan took the case to court and won, in turn pointing to compensation arrangements that would richly reward the CEO if there was even mild change on the board of directors.

Proxy advisor Institutional Shareholder Services (ISS) pulled few punches in its recommendation, saying Masimo was “a public company that operates like a private business,” accusing it of having “a defensive and antagonistic rhetoric, which includes?unsupported attacks on the dissident that are so far-fetched as to be absurd” and “a transactional understanding of corporate governance, in that improvements are to be used as bargaining chips.”

In this context, the company’s corporate governance and executive compensation became almost as central to the fight as strategic arguments, the more so because the board doubled down on them.

Pitney Bowes

At logistics company Pitney Bowes, Hestia Capital Management argued for a breakup and a CEO change. While proxy advisors were wary of the level of change that was being proposed, the combination of poor financial performance and weak governance gave the activist four out of nine seats.

One tactic that surprisingly failed to help the company was refreshing its board. Glass Lewis noted in its report that although the company had appointed six new directors in five years, with eight departing, too many of the new additions had worked with Pitney Bowes’ CEO in the past, or been recommended by a sitting board member. The proxy advisor concluded that, although it wasn’t recommending a CEO change, “[W]e do share Hestia’s concern that the Pitney boardroom has long lacked truly independent directors who are willing to question Mr. Lautenbach’s judgment on strategic and operational matters and, if necessary, hold him accountable.”

Fujitec

Japanese elevator manufacturer Fujitec neutralized a 2022 withhold campaign in the worst way possible. After ISS and Glass Lewis recommended that Fujitec CEO Takakazu Uchiyama – son of the company’s founder – be removed from the board of directors following a scandal over related-party transactions, the company appointed him executive chairman.

In March, Oasis Management installed four board members after a campaign in which the activist warned that Uchiyama could return if it was unable to change the composition of the board. Uchiyama subsequently failed to elect his own eight-person board slate after warning that Oasis could push through a sale of the company.

Amarin

Proxy voting advisors aren’t the only determinant in a proxy fight. Indeed, both ISS and Glass Lewis supported management at Irish drugmaker Amarin (which is listed in the U.S.). But the company still lost seven board seats in a vote earlier this year, with the remaining directors resigning soon after to give Sarissa Capital Management’s slate a free hand to chart a new course.

The fight came nearly a year after Sarissa pounced on a disappointing earnings announcement that cut the stock in half, with Amarin’s board already enjoying weak support at its 2022 annual meeting.

In an April article entitled ”How not to win a proxy fight,” Insightia highlighted the importance of knowing your shareholder base and addressing their unique concerns. “The institutional investors fled the sinking ship and what was left were really angry retail investors,” said one securities lawyer specializing in defending companies during proxy fights, including versus Sarissa. “They handed Sarissa a stunning victory because of the completely unmitigated and totally understandable anger.”