Let’s say, for argument’s sake, that you are a member of a long-entrenched board of directors. Perhaps at a company that has been run (ineptly, perhaps) exclusively for the benefit of its ruling family. Then, disaster strikes, and someone—perhaps Carl Icahn, or Dan Loeb, or someone who used to work for Carl Icahn or Dan Loeb—notices just what a corporate governance and/or shareholder value nightmare you’re supposedly to be overseeing.
Now, let’s make the further assumption that all of the outrageous things the aforementioned activist(s) will say about you and the company to which you have a fiduciary duty are true. With that annual meeting coming up and a full slate of dissident director candidates eyeing your board fees, how will you ever convince the shareholders you’ve been screwing to keep you on?
Casting aspersions about the other guys probably won’t work, because, well, people who live in glass houses and all. And there isn’t enough time to make a few token moves to show that you’ve learned a thing or two from the ordeal—and even if there were time, well, you and the cronies just don’t feel like. And now those bastards at the proxy advisors are calling for your head.
Well, thanks to the infallible folks at Moody’s, you’ve now got a whole new argument to trot out: If Carl Icahn or Dan Loeb or one of their protégés take over, we’ll be downgraded, and then the activist trash who take over will have to pay way more to leverage the hell out of the company to pay themselves off, and will leave you the long-term shareholder holding the bag. And it won’t be my fucking problem anymore, because you’ll have kicked me out. So there.
"Activism is rarely good news for creditors," Moody's Investors Service said in a report Monday. The ratings firm believes the push to return cash can erode the cushion for debt, increasing the likelihood of default. Last year, 56 companies Moody's rates were targeted, and the firm expects more.
Commonwealth REIT, for example, on Monday warned shareholders that if activists Corvex Management LP and Related Cos. are successful in their bid to replace the company's board of trustees, its credit rating could be downgraded.
Commonwealth's appeal to shareholders came after Moody's on Friday said it was reviewing the REIT's rating for a possible downgrade pending the coming board vote. A downgrade would send Commonwealth's rating into junk territory. Commonwealth says removing the board could raise unprecedented issues, including for its credit rating.
Activist Investors Put Bondholders in Crossfire [WSJ]
Zell fighting to lead $6.6B REIT [N.Y. Post]
Glass Lewis Recommends CommonWealth REIT Shareholders Vote to Remove Entire Board of Trustees [PR via WSJ]