US: A Record Year for Shareholder Activism
Question: What single force can get Tyco International to strive for cleaner emissions, inspire PepsiCo to study the impact of AIDS in developing nations, and even get Merck & Co. to declare its intentions to not manufacture an abortion pill?
Motivated to be heard in the post-Enron age, shareholders are flexing their muscles, demanding responsible policies and practices in unprecedented ways. And though some still feel like second-class citizens behind executive elites, shareholder activists are reporting new receptivity to their causes - thanks, they say, to a scandal-charged atmosphere that has management humbled and listening.
"The embarrassment of the scandals is leading companies to talk," says Daniel Rosan, director of public health for the long-time shareholder activist network, Interfaith Center on Corporate Responsibility. "Savvy companies have realized that shareholder concerns are a kind of feedback they need."
The chief barometers of shareholder activism indicate the movement has reached new heights since the wave of corporate scandals began in 2002. In that year, shareholders brought 802 proposals to a vote at company annual meetings, according to tracking data from the Investor Responsibility Research Center. In 2003, that number jumped to 1,082. So far this year, a record 1,147 proposals have been made as the five-month proxy season winds down this month.
What's more, shareholder proposals - once regarded as voices crying in the wilderness - are now receiving more votes. A record 161 proposals won majority support from shareholders in 2003. That record could be broken this year.
What shareholders want ranges from limits on chief executive officer pay (the most common proposal) to nondiscrimination policies that include sexual orientation. Although they are nonbinding, resolutions commonly work by bringing unwelcome public attention or even shame upon a corporation.
Beyond resolutions, however, lies an array of other tools in the shareholder activist's toolbox. And what activists find most inspiring about the current climate is the potential for influencing corporate policy without going the resolution route.
"I don't like to use shareholder proposals because you're starting out in a combative position," says Frank Rauscher, president of Aquinas Funds, a mutual fund for advancing Roman Catholic social causes. "We've been very successful, especially in the past few years, through dialogue alone." For example, the fund company sent a letter to Merck & Co. management outlining the liabilities potentially associated with the manufacture of the RU-486 "day after" abortion pill. That was all it took to obtain a statement that the company would not manufacture it, Mr. Rauscher says.
Since shareholders own portions of public companies, each has a right to vote on nominations for boards of directors and other proposals presented at annual meeting. Proxy forms sent in the mail enable shareholders to vote without attending in person. What's more, anyone who owns $2,000 or more in stock can, according to the Securities and Exchange Commission, draft and present a proposal for consideration by all shareholders.
In general, proposals aimed at social or corporate governance issues come from attorneys or specialized firms hired by major institutional investors, such as universities, unions, or state pension funds. But individual investors are making their voices heard as well by teaming up with coalitions of like-minded investors and using collective clout to advance their agendas.
It often works like this: An individual investor brings personal concerns about board-member independence or a firm's political contributions, for instance, to an investor networking organization, such as the Advocacy and Public Policy Program ( www.shareholderaction.org ). There, he or she learns how others - such as mutual funds or Calpers, the giant California pension program with $165 billion invested - plan to vote at a particular company's annual meeting. They can also learn who, if anyone, is leading the charge. If a campaign has already begun, the investor might become a signatory to a petition, a proxy voter, or possibly even a participant in meetings with management. Out of such steps or other creative means to reach the right corporate decisionmakers, an activist is made.
Many shareholders who never bothered to vote their proxies and instead by default affirmed management's plans have seized a new role since the collapse of Enron. In Maine, for instance, State Treasurer Dale McCormick promptly instituted proxy voting guidelines for companies owned through the state's $7 billion pension fund. And for the ordinary Maine investor outraged by corporate fraud, Ms. McCormick has answered
a call for lessons in activism by writing how-to articles for the general public.
"The annual shareholder meeting is the one time of the year when shareholders get access to the board of directors and management," she says. "We have a big role to play in cleaning up the corporate scandals, and you're either part of the solution or part of the problem. You're part of the problem if you're letting someone else vote
Still, the $64,000 question persists: Does it work? Do shareholder voices actually lead to new corporate policies? On that question, the jury is still out, since management sometimes takes years to respond to shareholder concerns. But signs do suggest more movement than five or 10 years ago.
On one hand, management has yet to respond to certain new pressures. In notable examples from the current proxy season, 37 percent of shareholders of the oil exploration firm Apache Corp. demanded a report on the company's efforts to reduce greenhouse-gas emissions. At the Fifth Third Bancorp annual meeting in May, 63 percent of shareholders called for a nondiscrimination policy toward gay and lesbian employees, despite management's silence on the issue. Whether executives will act on these shareholder directives remains to be seen.
But in some cases, shareholders are already claiming victories. American Electric Power Co., for instance, apparently heard the voice of investors, led by Connecticut Treasurer Denise Nappier, who demanded in 2003 more disclosure about the company's impact on global warming. This year, under pressure from another pending shareholder resolution, the company agreed to let an independent committee oversee a report.
Satisfied shareholders withdrew their proposal.
"Typically the annual meeting has been a 'rah-rah' event for the company and for management," says Tracey Rembert, advocacy director for the Social Investment Forum. "Some [firms] don't take shareholders very seriously, but more and more are finding they need to."
With shareholder activism still in its infancy as a movement, investors find that
handwritten letters have at times prompted six or eight-page responses from executives. And for those who prefer the stick to the carrot, Rauscher says shareholders are beginning to discover the potential for lawsuits against management when those in charge convey "misleading information" on social issues or other matters.
Whether the gentle approach ultimately gets further than the tough one is not yet clear. But in the meantime, Rauscher expects investors to keep seeing encouraging signs. "Social activists are realizing the big institutional investor might vote for a CEO pay limit and take the rest of the little guy's proposal [with social concerns attached] along with it," he says. "You just might find it gets approved."
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