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Argo-Voce: The path forward

Since Voce Capital Management disclosed a 5.6 percent stake in Argo on 4 February, the parties have been engaged in a heated dispute, with the exchanges between the firms centring on the Bermudian’s corporate expense discipline and integrity in the boardroom.

Shots have been fired on both sides, as Voce attacked the Argo board’s “lack of pluralism” and characterised it as “incestuous”, while Argo accused Voce of misleading investors and criticised the activist’s unwillingness to engage “constructively” with the board.

Given the number of back and forths, we have compiled a brief timeline outlining the events of the past two months.

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All eyes on the proxy contest

All the noise and posturing had effectively one main purpose – to win shareholder votes.

And now, after two months, we are nearing the first key checkpoints – Argo’s annual general meeting and a proxy vote in which shareholders will be able to have their say. At the same time, we will learn whether the recent turbulence is likely to be part of a longer-term period of change at Argo.

Issues to be considered at the upcoming general meeting are reflected in the preliminary proxy statement issued by Argo on 26 March, and which is still subject to updates.

The proxy statement brings forward 12 proposals. For us, the key proposals are:

  • Proposal 1 by Argo to re-elect five Class III directors for another three years, with Argo proposing one candidate in opposition to one or several of these directors.

  • Proposals 5 to 9 by Voce to remove current directors.

  • Proposals 9 to 12 by Voce to elect four new directors.

The proxy statement also specifies that, as submitted by Voce, in the event someone joins Argo’s board between now and the proxy vote, they will also be proposed for removal at the annual meeting. All the proposals will be decided by a simple majority of the votes cast by qualifying shareholders.

Voce considers the board to have 11 validly appointed directors versus 13 de facto occupying the board’s seats. As shown in the infographic earlier, the activist has claimed that the recent appointments of two new directors violate Bermuda law, as well as Argo’s own bye-laws. Notably, one of the two newly appointed directors is scheduled for re-election under Proposal 1.

Voce is proposing its own nominee for a Class III director seat – Charles Dangelo, the former insurance executive and director at various boards at Starr and AIG. However, it is unclear from Voce’s proxy statement whether the activist is proposing Dangelo in addition or in opposition to Argo’s slate of Class III directors.

The activist further proposes to remove four directors who are not scheduled for re-election at this general meeting, and to replace them with its own nominees (see infographic below).

On the other hand, Argo’s board recommends voting against Voce’s proposal to remove four incumbent directors. The board’s special nominating committee, formed three weeks ago to exclude the board members who are subject to Voce’s removal proposals, also recommended shareholders vote against Voce’s four director nominees, and against Dangelo as a replacement for one of the Class III directors. In short, Argo is resisting every single one of Voce’s suggestions.

Board tenure a key issue

In response to Voce’s criticisms of the board’s integrity, Argo pointed out that its nominating committee has a refreshment process in place. The committee reportedly verifies that chairs of all the committees are regularly refreshed.

The board also claims that as part of the refreshment process it has introduced five new directors since 2016. However, there is one potentially important observation that can be set against it.

Six of the 13 incumbent directors have been on the board since August 2007, when Argo formed following the merger of equals between specialty insurer Argonaut Group and reinsurer PXRE Group. Most of the six had also served on the boards of either Argonaut or PXRE for six to eight years prior to the merger.

Argo board

This points to a possible domination of the board’s judgements and decisions by the group of long-serving members. This hypothesis further grows in strength when the average tenure of directors on the remaining seats of Argo Group’s board is added to the consideration.

We calculated the historic average tenure of directors occupying the remaining seats since the merger using data from S&P Global Market Intelligence. Together with the tenures of the six long-serving directors, we excluded from the sample the 11-year tenure of Harvey Cash, who passed away in April 2018. In result, we found that Argo’s newer directors have served alongside the six long-serving directors for only 16 months on average.

According to corporate governance orthodoxy, this creates potential for unwanted subordination, hierarchy and cosy relationships, as well as occurrence of social proof, conservativism and other related biases on the board that may hurt its objectivity and eventually lead to decisions that fall short of shareholders’ best interests. As such, it follows that if Voce wants to apply significant changes to the Bermudian’s strategy and expense policies, it may struggle to do so without reshuffling the board.

Voce’s commitment to target board-related governance in the early stages of its activism therefore looks a well-planned manoeuvre. Especially so, given its track record of hostile interventions at Natus Medical, where Voce succeeded in shaking up the board and C-Suite.

The activist emerged on Argo’s shareholder register with a 5.6 percent interest a few months before an annual general meeting where five (four if Samuel Liss’s appointment proves unrightful) directors out of 13 are set to be re-elected. With Voce seeking the removal of four additional directors from the classes other than Class III, that puts 70 percent of directors at risk of losing their seats. That significantly increases Voce’s chances of having a “dissident” in the boardroom.

Also, what’s clear is Voce’s intention to refresh average tenure of the board, as all four directors proposed for removal by the activist have served on the board for at least 15 years (including their tenures on the boards of Argonaut and PXRE).

Challenges ahead

Moving on to challenges that Voce may encounter in its bid to shake up the board, we highlight two key issues.

First, elevated expenses – the crux of Voce’s criticism – are an issue that the company has already attempted to correct. In 2018 the expense ratio improved by 2.4 points to 37.6 percent from 40.0 percent in 2017. And though still high relative to the industry standard, this can still be used as a sign of commitment by the board and management to more rigorous expense management.

As such, the vote in part will reflect investor confidence in management’s ability to continue to improve the company’s expense structure, an area of significant underperformance when taking a longer view.

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Second, Argo’s recent stock performance may be a crucial factor.

The stock has outpaced peers and the S&P 500 index over a one-year, three-year and five-year period, and has approximately been as rewarding as its peers and the wider market over the last 10 years.

The carrier trades at price-to-book multiple above Everest Re and Axis, level with Arch and RenaissanceRe, but behind all US specialty peers – about what you would expect given Argo’s business profile as a Bermuda-based US specialty-focused carrier.

Part of Argo’s recent outperformance can be attributed to the firm simply catching up on valuation, having traded at a significant discount to most peers in the not-too-distant past.

But the question is whether investors will be willing to mess with the status quo and shake up the board when the stock has been rising. Again, much will depend on investors’ confidence in management’s long-term vision and ability to execute without firmer oversight now that the easy “catch-up” trade is over.

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The next step

Another important factor in the process is the view of the proxy advisory firms, which is likely to come out around one to two weeks prior to the general meeting. The influence of their recommendations could have a significant influence on proceedings, particularly for votes held by passive investors.

Ultimately, for Voce, success or failure may depend not simply on the number of board seats won but on beating expectations. For Argo, only a resounding victory and strong vote of confidence from shareholders is likely to suffice.

For the activist, even a gradual remake of the board with one or two dissident board members may be seen as a huge win. Such directors gain access to inside information and are able to challenge the status quo on the board.

Voce would also gain credibility if its dissident directors were able to broadly confirm the suspicions outlined in its campaign to date, possibly leading to more board seats in the future.

Crucially, Voce may also “win” even without securing a single board seat if a substantial portion of Argo’s shareholders revolt, and the incumbents win by only a very slim majority. This has been seen in other activist campaigns such as Trian’s proxy fight against Du Pont, which saw the company “win” the vote but still led to the unceremonious dumping of CEO Ellen Kullman within a few months.

Argo does not need just a win, it needs a decisive victory. And as we have written elsewhere, what happens at Argo may have significant consequences for the industry.

Though once seen as too complicated due to regulation and capital requirements, the sector is now seeing a surge of activist interest that is likely only to increase if a successful model of change is demonstrated.

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