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Diversity Push at National HealthCare May Attract Activists

By Ronald Orol

A large swath of National HealthCare Corp. (NHC) shareholders want to see the nursing home and assisted living facilities operator’s all-male board come up with a plan to improve director diversity.

The Murfreesboro, Tenn.-based company on Tuesday reported the results of its May 7 annual meeting, in which 59% of voting shares, supported a shareholder proposal requesting such a plan from the company. The diversity proposal was submitted by the Comptroller for the state of New York, which argued in proxy filings that “numerous institutional investors believe that diversity on boards is an indicator of good corporate governance.”

In addition, about 38% and 33% of shares cast voted against directors Ernest Burgess III and Emil Hassan, respectively, in an uncontested election.

Both the push for a diversity report and substantial negative director votes suggest National HealthCare could come under attack by an activist hedge fund manager seeking to mobilize disgruntled investors by shaking up the company’s board at its 2021 meeting or through a public campaign in the interim.

An activist campaign could be bolstered by National HealthCare’s share performance. The company, which has a $962 million market capitalization and is incorporated in Delaware, has seen shares crater amidst the coronavirus pandemic before recovering somewhat. Its shares are down 27% year-to-date and 19% over the past 12 months.

One adviser to companies targeted by activists suggested that the company could make a good activist target in light of its stagnant performance and trouble with institutional investors, including the California Public Employees’ Retirement System.

The big negative votes emerged after CalPERS, the largest U.S. public pension fund and holder of 30,600 National HealthCare shares, urged investors through an “exempt solicitation” campaign to vote against directors Burgess and Hassan as well as Andrew Adams. The campaign, which allowed the investor to speak with other shareholders and call for votes against the directors, noted the three “have demonstrated a lack of responsiveness to multiple CalPERS shareowner engagement requests to address board composition related to diversity.”

In addition, proxy adviser Glass, Lewis & Co. LLC, recently urged investors to vote against Adams and Burgess. According to a report obtained by The Deal, the adviser said Adams was not considered independent and noted that Burgess was the father of Lynn Foster, a company employee “who received in excess of $120,000 in salary and benefits as an administrator of one of the company’s healthcare facilities in fiscal 2019.”

In defense of its board, National HealthCare in its April definitive proxy statement, opposed the diversity proposal, noting it “could inadvertently limit the nominating and corporate governance committee’s ability to select the most suitable and qualified candidates for membership on the board.” It also said the proposal could “impose inefficiencies” and “unnecessary administrative burdens and costs” on the board.

There are some governance obstacles to an activist director fight. Despite the largest segment of shares being held by institutional and retail investors, insiders such as directors and the company’s employee stock ownership plan and trust collectively control about 18%.

In addition, board elections are staggered, which means an activist couldn’t take control of NHC’s board in one year.

National HealthCare on Monday announced it was instituting a quarterly 52 cents a share dividend.

Roughly 17 National HealthCare investors are hedge funds, representing about 5% of shares outstanding, according to FactSet Research Systems Inc.

California, where CalPERS is based, has made a big push of late towards gender diverse boards. In 2018, the state approved a law that requires California-based public companies to have one woman on their board by 2019, then either two women for five-person boards or three women for six-person boards by 2021. Tennessee, where National HealthCare is based, has no such statutory gender diversity mandate.

According to relationship mapping service BoardEx, a sister company to The Deal, five companies, including Interactive Brokers Group Inc. (IBKR), Ollie’s Bargain Outlet Holdings Inc. (OLLI) and International Bancshares Corp. (IBOC), in the S&P mid cap 400 index, have no women directors.

In addition, 24 companies in the S&P Small Cap 600 index, including Titan International Inc. (TITAN), Ebix Inc. (EBIX), and Vicor Corp. (VICR), have no women directors, according to BoardEx. All corporations in the S&P 500 have women directors.

NHC did not return a request for comment.

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