Penn Entertainment shareholders will have a tough choice at the operator’s annual meeting next week, after the two largest proxy advisory businesses — Institutional Shareholder Services (ISS) and Glass Lewis — gave differing instructions on whether to vote for a third nominee to Penn’s board.
ISS and Glass Lewis are influential firms that recommend to shareholders, especially hedge funds, how they believe votes should be cast on important motions at companies’ annual general meetings.
ISS is the largest proxy advisory business, controlling 48% of the market, but Glass Lewis is not far behind at 42%.
With Penn Entertainment’s annual meeting approaching on June 17, activist investor HG Vora is encouraging shareholders to vote for Carlos Ruisanchez, Johnny Hartnett, and William Clifford to Penn’s board.
Penn, on the other hand, says only two seats are open after it controversially shrunk its board from nine members to eight. While it has nominated Ruisanchez and Hartnett, it did not nominate Clifford.
Penn has no plans to seat Clifford, but an ongoing lawsuit launched by HG Vora could force it to do so.
The fight over a ninth board seat forms a part of a wider battle between HG Vora and Penn over the operator’s digital strategy and the leadership of CEO and President Jay Snowden.
ISS: Support for Clifford warranted
On Friday, ISS took HG Vora’s side. It said “support for Clifford, as well as Hartnett and Ruisanchez, is warranted on the dissident card.”
“The board lacks an adequate level of direct gaming industry experience. It appears that this deficiency has hampered the board’s ability to effectively oversee management during the push into interactive, which has in turn translated into disappointing [total shareholder return] and operational results,” it said. “There is little evidence that the board has been able to hold management accountable, which suggests that a director who is not afraid to share a contrarian viewpoint may be a valuable addition.”
It also pointed to failures at Penn that HG Vora had highlighted previously, especially with expensive acquisitions and its efforts in online sports betting.
“It is particularly difficult to overlook the negative inflection that coincided with expansion into online sports betting, which is highlighted by [HG Vora],” ISS said.
Given that Penn argues the seat Clifford is running for does not exist and is not putting up its own candidate, there is not a clear threshold for him to reach. His votes will not be counted by Penn unless a court determines it must do so, in which case even one vote would be enough to put him on the board as there would be no opposition to his candidacy.
The approval of ISS is seen by HG Vora as a milestone in its effort to convince shareholders to vote for all three board candidates.
But Glass Lewis had a different view of the situation. On Monday, it issued its own report, calling on shareholders to only vote for Ruisanchez and Hartnett.
“Based on our review, we believe certain aspects of Clifford’s profile may overlap with existing or anticipated members of the board,” the report said. “The board’s assertion that his background is not sufficiently differentiated — and its unanimous decision not to support him despite backing two other dissident nominees — raises questions as to whether he would bring distinctive value at this time.”
Penn welcomed the backing of the advisory firm.
It said: “We are pleased Glass Lewis recognizes the Board’s thorough review of all three of HG Vora’s nominees, our responsiveness to shareholder feedback regarding refreshment and the rigorous regulatory oversight of the gaming industry, in particular the restrictions imposed related to our engagement with HG Vora.
”Glass Lewis also acknowledges the strength and depth of the skills and experience our directors bring, in addition to our significant refreshment efforts.”
Penn: Clifford has ‘antiquated views’ of industry
Penn hit back at ISS Monday, arguing that Clifford — who previously served as its chief financial officer — was not a suitable board candidate.
It claims that during his time as CFO, Clifford argued against the introduction of a loyalty program, which later became a lucrative addition to Penn’s business.
“In reaching its conclusions however, the ISS report fails to reflect a realistic view of William Clifford’s candidacy,” it said. “We remind shareholders that, during his time as PENN’s CFO, Mr. Clifford advocated against key initiatives that were critical to succeeding in a competitive market. Following Mr. Clifford’s departure in 2013 as PENN’s CFO, these changes were implemented … and resulted in meaningful margin improvement.
“Further, during his interviews with PENN’s Nominating and Corporate Governance Committee, Mr. Clifford demonstrated antiquated views of a rapidly changing industry, and the same posture of resistance to exploring value-generating solutions, which we believe would hinder constructive decision-making.
“PENN attempted multiple resolutions with HG Vora, but all of our resolution attempts were rejected. Given HG Vora’s violation of its institutional waivers by multiple state gaming regulators, our ability to allow HG Vora to influence the governance of the company beyond the evaluation of the nominees was expressly prohibited.”
VC partner: Proxy firms are ‘judge and jury’
In 2022, Sequoia Capital partner Michael Moritz said ISS and slightly smaller rival Glass-Lewis had “become judge and jury for the actions of corporate America” after shareholders revolted against Apple CEO Tim Cook’s pay.
The exact level of influence that proxy advisory firms have is debatable, but Penn Entertainment’s shareholder structure may make it more likely that investors will be paying keen attention to the two reports.
Investing giants BlackRock and Vanguard are Penn’s two largest shareholders, each holding an 11% stake. The pair are clients of both ISS and Glass Lewis, though both are also large enough to have their own research teams.
Most of the rest of Penn shares are held by smaller hedge funds, the type of businesses most likely to be swayed by a proxy advisor. While 83% of Penn’s shares are held by institutional investors, most own fairly small stakes.
Smaller proxy advisory firm Egan-Jones issued a report last week encouraging investors to back Clifford’s nomination.
