Roel C. Campos, the U.S. Securities and Exchange Commission's senior member, speaking in Philadelphia today, coached corporate board members on how to avoid costly regulatory and shareholder disputes.
His main advice: Talk frequently with major investors. "They don't want to run your company, but they do want to be listened to," he told 100 members of the National Association of Corporate Directors Philadelphia chapter over muffins, fruit and coffee at the top of Bell Atlantic Tower.
About 70 percent of proxy battles, "which are hugely expensive and disruptive," can be avoided with good communication, he said.
In the audience, Damien J. Park, chief executive of Hedge Fund Solutions L.L.C., was taking notes. "I'm going to use that with my clients," he said later. "I've never seen a proxy fight that didn't cost at least $1.5 million. You have to hire lawyers, public relations people, accountants - and advisors like me," Park added.
Campos predicted that shareholder activism will grow and that executive compensation will draw more hostile fire.
Endowments, pension funds and other institutional investors have long dominated corporate investing. "But now we have deep pools of money in what we call hedge funds, though many don't function as hedge funds," Campos said.
Many of these funds, he said, make large investments in companies, and then seek "a dialogue with management about how they think things should be done. No one likes to be told what to do, or that their management decisions don't make sense. So there is tension. This is occurring more and more," Campos said.
If activist investors are thinking only short-term, seeking a temporary boost in share price, "that's bad," he said.
Change, he said, requires that directors "really understand what's good for the corporation" and make smart decisions about which investors might become allies in a fight.
Campos, a Harvard Law School graduate and former federal prosecutor, was appointed to the regulatory commission by President Bush in 2002. He has recently been confirmed by the Senate for a second term, ending in 2012.
He predicted that executive compensation will get increasing attention from shareholders. Many companies, including Verizon Corp., are being pressed to allow shareholders to cast a non-binding advisory vote on compensation. Such votes are now common in the United Kingdom, he said.
"CEOs seem to make too much," he said.
He said board members must make certain they know what all the compensation they have approved "adds up to - you have to demand to see the whole picture."
He said some boards have added compensation without being aware of increases that were built into the original employment contract.
What he called "spring-loaded stock options," will come under increased scrutiny, he said. These options are granted just prior to an announcement that will increase stock value. "A lot of investors don't like the idea of granting stock options based on inside information," he warned.
He said the SEC continues to investigate the practice of back-dating executive stock options to days when shares were worth less, "which appears to have become a way of life" in corporate America.
Campos said most regulatory problems can be avoided if executives make decisions based on basic business rules. "A decision can't be for the benefit of you or a relative. It must benefit the business as a whole, not a particular deal," he said. "If that context is kept in mind, the courts will support you."
Judith Von Seldeneck, chief executive of Diversified Search Cos. and president of the local board members' group, agreed with Campos that shareholder activism will continue to rise.
"In today's increasingly complex environment," she added, everyone - directors, management and investors - will increasingly be in the spotlight and "held accountable by the public."