Institutional investors fight for more sway at healthcare companies

For the second year in a row, Community Health Systems faces anxious institutional shareholders seeking to overturn the way it elects its board of directors.

Company officials argue that the proposal those investors have put on its shareholder ballot, which would make it easier for dissident shareholders to run a competing slate of directors against the incumbent board, is unnecessary because investors already have ready access to the board. It would also discourage qualified board members from wanting to serve if they faced the prospect of an annual election fight, the company said in its proxy materials.

“We believe that the proposal submitted by the proponent takes a 'one size fits all' approach to proxy access without considering the company's corporate governance practices, which ... already provide stockholders with a meaningful opportunity to hold the board accountable in the nomination and elections of directors,” the board wrote.

The latest vote on so-called “proxy access” will be taken at the Franklin, Tenn.-based hospital chain's annual shareholder meeting May 17. Connecticut State Treasurer Denise Nappier, the lead proponent of the measure, put proxy access on the CHS shareholder meeting's agenda for a second time after losing by the narrowest of margins at last year's annual shareholder meeting, 50.3% to 49.7%.

Connecticut's $29 billion employee pension and retirement fund, which owns $9.5 million worth of CHS stock and fixed-income instruments, isn't the only major institutional investor backing the proposal. New York City's employee pension and retirement fund and the UAW Retiree Medical Benefits Trust are also backing proxy access. At other firms, the California State Teachers' Retirement System, California Public Employees' Retirement System, TIAA-CREF and the Vanguard Group have joined in investment pools backing proxy access.

Under the most common form of proxy access, nominating shareholders must have owned at least 3% of a company's common stock for at least three years. Companies will often require at least 20 shareholders be part of the nominating group and set a limit of 20% of board seats subject to proxy access voting.

The push for proxy access is just part of the latest wave of shareholder activism that seeks to shake up the way U.S. corporations are managed and governed, including in the healthcare sector. Giant funds are intent on modifying the behavior of companies they deem unresponsive to their needs.

Proxy access is only the tip of the activist spear for these institutional investors. Shareholders at publicly traded healthcare firms this year will get to vote on corporate reforms including drug price transparency, executive compensation and board diversity, proxy statements show.

The funds pushing the proposals have both financial and social concerns and sometimes both. The United Auto Workers medical trust, for instance, is looking for higher returns as an investor, as well as seeking to protect its members' interests as healthcare consumers. In fact, it is the single largest private purchaser of healthcare in the nation, providing coverage for more than 720,000 autoworker retirees and their dependents.

New York City's massive $160 billion pension and retirement fund is another major player in the shareholder activism world. New York City Comptroller Scott Stringer, who is responsible for managing the fund, was very effective last year in getting proxy access adopted at target companies—including at two-thirds of the 66 companies where it went to a shareholder vote.

This year the fund has already persuaded the boards of 50 companies to voluntarily adopt the measure without it going on a ballot. One of those companies yielding to the comptroller's pressure was drugmaker Vertex Pharmaceuticals.

The $60 billion UAW trust has swayed three other healthcare companies to voluntarily adopt proxy access, said Meredith Miller, the trust's chief corporate governance officer. They are Bristol-Myers Squibb Co., CVS Health and Gilead Sciences.

According to data from Institutional Shareholder Services, shareholder proxy access proposals last year won 54.8% average support on 91 proposals that came to a vote. ISS found that 117 companies adopted proxy access last year, while only 16 firms adopted the provision between 2003 and 2014. About 21% of companies on the Standard & Poor's 500 index have adopted proxy access, up from about 1% in 2014.

But proxy access is not the only issue in activists' sights. Charged with making that $60 billion last for decades to cover retiree healthcare, the UAW trust also may get involved in company governance of healthcare and pharmaceutical companies if it suspects price gouging, excessive executive compensation or a lack of director diversity, Miller said. She said she prefers quiet diplomacy with the investor-owned companies in which the trust invests.

But sometimes behavior modification requires public action. And the trust isn't shy about using proxy proposals to get issues before shareholders if conversations with management and its board prove fruitless. “We're looking out for our long-term interests and investments,” Miller said.

For instance, she said she asks company boards that have apparently excessive drug prices whether that choice is sustainable over the long-term and what might happen if those prices fall, either because of consumer or regulatory pushback.

At this year's annual shareholder meetings, the UAW trust has proxy items going to shareholder votes at Celgene Corp., Neogen Corp., PharMerica Corp., PTC Therapeutics, Spectrum Pharmaceuticals and Universal Health Realty Income Trust.

Proxy access is on the ballot at five of the six companies. The trust also wants to see greater drug-pricing transparency at Celgene; more board diversity at Neogen, PTC Therapeutics, Spectrum and Universal Health Realty; and an explanation of regulatory compliance by the PharMerica board.

Proxy access also has had an indirect influence on healthcare governance, Miller said. In getting proxy access voluntarily adopted at companies such as Gilead and Bristol-Myers, the trust has had the opportunity to discuss such important issues as drug-pricing transparency and whether boards have directors from purchasing backgrounds, Miller said.

Leaders of publicly traded firms are slowly bending to the will of shareholder activists. Indeed, leading corporate law firms are now counseling their clients to listen more carefully to the independent shareholders who've taken an active interest in how their companies are run.

“There is an emerging consensus that—regardless of size, industry or profitability—public companies must achieve greater accountability to their shareholders through engagement and transparency,” Howard Dicker, a partner at Weil, Gotschal & Manges, wrote online on the Harvard Law School Forum on Corporate Governance and Financial Regulation earlier this year.

After Gilead shareholders defeated a trust shareholder proposal last year asking the company to provide an annual report on the risks of pricing drugs the way it does, the company voluntarily adopted a similar proposal along with proxy access this year. Gilead came under congressional and public scrutiny last year for pricing its drug Sovaldi for hepatitis C sufferers at as much as $84,000 for a 12-week treatment.

In an e-mail, Nappier and the Connecticut Retirement Plans and Trust Funds said the funds expect to win on proxy access at CHS this year, given how close last year's vote was. CHS, which owns, operates or leases 160 hospitals, is the nation's second-largest hospital company by revenue.

Studies bear out the benefits of proxy access to shareholders, Nappier said. The most prominent, cited by Nappier in the CHS proposal, is a 2014 paper by the not-for-profit CFA Institute that suggested proxy access could raise overall U.S. market capitalization by up to $140.3 billion.

Proxy access “gives investors a tool to hold boards accountable and favors the creation of long-term value over disruptive short-term activism,” she said. “If we want to ensure that companies are truly managed for the long-term, we need more diverse, independent and accountable directors.”