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Free Proxy Fights: Why do they Fail Essay Sample
Introduction
In an organization, management of a company needs to be cautious of any takeovers. For this reason, the management needs to be aware of proxy fights. This is where a corporation decides to use a block of shareholders to vote out management or make changes in the organization (Gaughan, 2010). It can be seen that the power of many is stronger as compared to the power of one. For this fact, shareholders entrust their votes to an agent who will vote for them in unison for the purposes of making the recommended change they wish. On the contrary, they use this venture to remove the existing management if they see it to be ineffective. In this case, the proxy fights are extremely useful. However, proxy fights have a tendency to fail. It is not often that the proxy fights work. They tend to fail leaving the shareholders frustrated. Therefore, the main question is what causes these proxy fights to fail.
Discussion
In order to understand why the proxy fights have consistently failed in some situations, it is important to understand what proxy fights are. This is where a good understanding of how they are made, what they mean to an organization and how they are used within it, is needed. For this reason, the book ‘Merger, Acquisition and Corporate Restructuring’ has explained the proxy fights in depth (Gaughan, 2010). According to the book, proxy fights can be described as the process during which people who have a common interest use the shareholders` votes to make or change important issues in the organization. Second, these people may choose to use the proxy fights to change the management of the organization. Therefore, people bring the shareholders together to take the proxy votes for the purposes of having the majority of votes that can make a change.
According to the book, people or shareholders who want to see changes in an organization entrust their votes to an agent who will vote for their say in the organization (Gaughan, 2010). This may be tricky because not all people are always willing to trust their proxy votes to an agent. However, the gathering of votes is still done. An excellent proxy fight is the one that has the majority of votes from shareholders. The book states that a proxy fight with the majority of votes in an organization is likely to win as compared to one that does not contain the majority of votes. In this situation, the book has also shown that proxy fights have been successful to many organizations since their inception. Many organizations have been using this as an avenue to make changes in the management and when solving the issues of importance to the organization. Therefore, this shows that the proxy fights have been a success to many organizations.
On the other hand, the book has introduced the reason why proxy fights fail. According to the book, proxy fights started on a high note by becoming a success to many companies (Gaughan, 2010). However, the book has shown how different companies started to fail while using the proxy fights. The book states that proxy fights fail because they act as a sign of rebellion. When shareholders come together and vote as one, it shows that they might be rebelling. In this case, organization wars start to ensue and before the company could make the most efficiency decisions, it starts to fail. All this could be attributed to proxy wars started by people or shareholders. Second, the book has concluded that proxy wars tend to fail because the current management may already be part of the shareholders (Gaughan, 2010). Additionally, they use their position in the organization to cement their leadership for the purposes of staying at the helm of leadership, despite the proxy fights being used against them. This results in the failure of proxy fights.
According to the article, ‘The Insignificance of Proxy Access’, a proxy fight is deemed to fail (Kahan & Rock, 2010). The article states that this issue has been at the top of the list for the U.S. Security and Exchange Commission. If the management and the shareholders of a company are not in unison on issues that are to be changed or in agreement about the board members to be elected, proxy fights are going to fail. In most cases, the management of an organization and shareholders are usually not in unison on certain matters. This is because management of the organization has their own selfish gains while the shareholders are working in the interest of the company. In this situation, the two conflicts of interest will lead to the failure of proxy fights.
According to the article, proxy fights often involve other activities by the shareholders for it to be successful (Kahan & Rock, 2010). For instance, the use of proxy access in proxy fights. Proxy access can be described as the process where shareholders are made to choose or nominate a person in the board. In this case, shareholders are allowed to nominate somebody who they want to vote in the board of directors during elections. In this case, if shareholders choose one person in unison, they will definitely succeed. On the other hand, it is extremely difficult for shareholders to be in unison. This is because people are different. Henceforth, they will always have a different opinion. For this reason, the nominees chosen by shareholders will be more than one. As a result, their votes will split among many nominees. Eventually, this will lead to the failure of proxy fights.
If a nominee is able to successfully survive in the proxy fight and win the elections, he or she will not have much significance in the management of an organization. This is because not all other members in a board are elected by shareholders, but some are voted for by the company. For this reason, a board that has only one member elected by shareholders does not hold a true representation of shareholders votes. This fact proves that despite shareholders electing a nominee into board they cannot make any changes for an organization. Additionally, proxy access takes long. For instance, shareholders have to make deliberations so that they can be able to choose a person who is going to lead them. After, choosing the nominees, the election process starts. After this long process the nominee might not be elected proving the process not to be successful. On the other hand, if the nominee is elected, he or she will not be able to make any changes in the board if he or she is alone. Therefore, this indicates a failure of a proxy fight rather than its success.
Moreover, proxy fights fail because they are extremely expensive. According to the book, ‘Merger, Acquisition and Corporate Restructuring’ it is the cheapest method to make changes in an organization (Gaughan, 2010). However, in the same book, it is stated that proxy fights are a bit expensive. It is evident from the article ‘The Insignificance of Proxy Access’ which provided all the processes that a proxy fight goes through before it becomes successful (Kahan & Rock, 2010). All these processes are extremely expensive. For starters, they take a lot of time to be completed. For instance, the process of selecting a nominee requires a lot of time. This is because the shareholders have to be summoned to come together and choose their nominee. When the nominee is chosen, they need to wait for the management to select a date in accordance with the organization policy, the day they will elect the board members. The article has proven that it takes a lot of time for proxy fights to take place and they might not be successful.
Second, proxy fights require a lot of money to maintain. It is not only proxy access that is required, but other processes, including shareholders competitions. This process requires the shareholders to have certain amount of money, so that they can be able to begin the process. In certain situations, shareholders are required to have certain amount of money worth of shares for the purposes of contesting. After this, a meeting place has to be organized for the shareholders to meet. The meeting place costs money for the shareholders as well. Additionally, communicating to the shareholders also cost a lot of money. Holding the actual meetings cost money since a lot of maintenance has to be put in place. In this case, the article has proved that it is extremely expensive for the management and shareholders of the company to conduct successful proxy fights.
Another article supports these claims and gives a clear example of how proxy fights work and how they have continually failed to work. The article, ‘Third Point CEO to Continue Fight over Yahoo Board’ shows how Daniel Loeb, Third Point`s CEO, has been blocked out of the Yahoo board by the company (Oreskovic, 2012). According to the article, the Yahoo board handpicked their company directors without the consideration of the shareholders. And this has made Loeb extremely angry with the board resulting him to use proxy fights, since the shareholders are the ones who have been left out. With this example, it is easy to analyze whether the move will fail or succeed.
According to an article (Reuters), Yahoo and Third Point are trying to reach a compromise in order to avoid proxy fights (Oreskovic, 2012). One may tend to wonder why the two companies are trying to avoid the proxy fights. Although it is not stated in the article, another article ‘The Insignificance of Proxy Access’ has proved that proxy fights are extremely expensive and they can lead to failure of the company (Kahan & Rock, 2010). Additionally, the article has proved that it can fail despite its extensive usage by the board. For this reason, they are trying to avoid proxy fights because they will be either two expensive for the company or they might fail eventually rather than succeed. Therefore, these facts clearly show why the proxy fights fail instead of becoming successful in an organization.
According to the article, proxy fights are being used as a threat, instead of being used to benefit the company. Loeb is threatening Yahoo to make use of proxy fights if they do not accept him as a member of the board of the company (Oreskovic, 2012). In this situation, it shows that the proxy fights are being used as a strategy of threatening the Yahoo board, instead of using them in a manner for which they were intended. When they were initiated, they were being used as strategies of bringing effective changes to a company. In this case, they were immensely successful and efficient. However, many managers realized their power and they started misusing them to threaten other parties. As a result, the proxy fights are doomed to fail when they are being used by the CEO to threat other board members.
Proxy fights were developed to help shareholders make changes where they saw that management was not effective. In this case, shareholders would join their hands and vote for the necessary changes within the company to be implemented effectively. However, within the past few years, proxy fights were constantly failing. The causes of these failures may be hard to find, but using this article it can be seen that the two companies are not ready to use proxy fights to solve their disputes. This is because they are aware that proxy fight will fail instead of being successful. The mentality the two companies have placed on proxy fights is enough to make them fail. Therefore, the article states that the failure of proxy fights is also caused by the mentality of the managers, like in the case with Loeb.
According to the article, ‘Proxy Contest and the Governance of Public Held Corporations’, several causes, like objective of proxy fights, might lead to failure (DeAngelo & DeAngelo, 1989). After election of board members or nominees through successful proxy fights, it is necessary to understand whether the objective of proxy fights was met or not. If the objectives of proxy fights are not met, it means that proxy fights have failed. This is because they bring the company down, instead of making it effective. For example, according to the article, how sure the shareholders can be that members they are electing to the board of the company are highly competent as compared to those they are trying to vote out. If they are not, they will make ineffective decision bringing down the company instead of improving its efficiency. In this case, proxy fight will not be successful.
According to the definition, a proxy fight is a process when a person or an organization bands shareholders together to vote as one unit. Considering this fact, human beings will always be human beings. Despite people wanting to act on behalf of others for the rights of people, they will always have certain personal objectives they would like to fulfill. According to statistics taken from the articles, less than a fifth out of the companies that used proxy fights and successfully ousted out the management survived. They are either closed down or liquidated due to the decisions made by the elected board members. Additionally, the articles indicate that decisions made by these board members were influenced by their own personal goals. They were gaining while the shareholders and company were continuously losing. Therefore, instead of bringing success the proxy fights ended up being a failure.
According to the article, ‘Proxy Contest and the Governance of Public Held Corporations’, decision making in this proxy fights takes too long (DeAngelo & DeAngelo, 1989). The proxy fights were created for purposes of bringing speedy and efficient decision making in an organization. However, after the election, the board members have power to manipulate shareholders so that they can delay any decisions that will affect them. In the end, decision-making process takes longer, instead of taking less time which is the main objectives of proxy fights. Moreover, using their own personal goals, the board members may want to remove all barriers on their way (DeAngelo & DeAngelo, 1989). For this reason, they will tend to slow down the process in order to ensure that all the barriers are removed. Instead of proxy fights becoming successful, they end up becoming a failure to an organization.
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Another cause of proxy fights` failure in an organization is the conflict of interest of people elected to the board by shareholders. According to corporate governance, best governance is when leaders separate themselves from those people who elected them. This means that elected members or the board members should be independent from any party. However, according to the article, ‘The Institution of Corporate Governance’, this is not the case (Roe, 2004). Many people who are elected through proxy fights are the shareholders of the company. For this reason, they are controlled and, thus, they are not independent. In this situation, decisions they make are always controlled by other people. This leads to ineffective decision making processes within a company. Therefore, instead of proxy fights being effective and successful, they become a failure to an organization.
In proxy fights, certain people or organization tend to offer proxy fights for their own benefit. However, in most cases, people who benefit from proxy fights are creditors. This is because they are always first to be considered in any organization`s business. Therefore, when people or organizations that are offering funds realize this, they tend to halt their funds, because they will not benefit from the proxy fights (Roe, 2004). When they pull out from proxy fights, there will be no money to fund. According to the article, ‘The Insignificance of Proxy Access’, a proxy fight is extremely expensive (Kahan & Rock, 2010). If there is no money to fund it, then it will not be successful. This will result in a failure, instead of success.
Finally, according to the article, ‘The Model Business Corporation Act at Sixty: Shareholders and their Influence’, proxy fights will result in a failure to any corporate organization, as believed by those who oppose proxy fights. Recently, many organizations are trying to increase shareholders` power in corporate affairs of an organization. This situation will affect independence of a company. In this case, management of an organization will tend to concentrate on short-term financial results of a company, instead of c long-term ones (Verret, 2011). This means that a company is not concentrating on the long-term future success when it is controlled by shareholders, as compared to when it is independent. As a result, proxy fights fail, instead of being successful.
Recommendations
Based on the analysis of different sources stated above, it has been observed that proxy fights tend to fail because of certain causes. The first cause is that they are extremely time consuming. Additionally, they are expensive for both the company and the shareholders. The different processes involved in proxy fights are time consuming because shareholders must come together and deliberate on whom they are going to vote. Moreover, deliberations need a lot of money to maintain shareholders. Second, people who are voted for through proxy fights have their own personal ideas and goals. As a result, they lead the organization to close down or liquidation. Additionally, when shareholders are involved in company`s corporate affairs, management does not have the will to manage a company effectively.
For this reason, an organization should consider revaluation of some of the policies that involve shareholders` powers over voting. In this case, it will eliminate those people who have other personal agendas in a company. Additionally, an organization should come with measures that cut costs on proxy fights. If the matter is important, they should take the voters` opinions seriously, but if the matter is not serious, they should consider other not very expensive ways. Finally, those people who use proxy fights as a way to threaten other party should be sued or charged in court, because they are misusing one of the most effective strategies, thus making it to fail (Verret, 2011).
