Shareholder Activism: A View From the Plateau

11 MINS READJun 2, 2006 | 02:46 GMT
By Bart Mongoven The first week of June marks the climax of the 2006 corporate meeting season. Looking back, this year's season was much like last year's: No significant new themes emerged, and the vote numbers in favor of activist resolutions were little changed. Between 2001 and 2005, however, shareholder activism was a realm of dramatic change, with shifts in everything from the way resolutions are written to the numbers of votes they typically receive. These shifts have led corporations to address shareholder issues in new ways, and the trend has encouraged increased numbers of organizations to become involved in the shareholder process. This revolution now appears to have slowed, marking a plateau, and a view of the new world of shareholder activism is becoming clearer. The chief characteristics of contemporary shareholder activism — those that differentiate it from the campaigns of the 1990s — include the increased participation of politically ambitious state officials, a focus on the risk-aversion common to corporations (and investors), and dramatically increased vote numbers in favor of shareholder proposals (and in opposition to management's position on given issues). These simultaneous changes are making corporate leaders increasingly willing to sit down with activists — away from the annual meeting — and negotiate resolutions to the issues they raise. The net result is that many corporations are rapidly changing policies to stay ahead of critics (and quite far ahead of regulators). These strict corporate policies, in turn, place pressure on rivals to either follow suit or be branded as laggards by activists. Shareholder Activism: New Levels of Success The shareholder mechanism is not new. Since the 1930s, shareholder resolutions have been used to demand action from corporate boards of directors. The most important turning point in the shareholder activism movement came in the early 1970s, when the National Council of Churches created the Interfaith Center on Corporate Responsibility (ICCR) to use shareholder votes as a way to achieve social activist objectives. Over the past 30 years, ICCR has blazed the trail that contemporary shareholder activists now follow. In that time, ICCR has led shareholder campaigns on issues as diverse as infant formula marketing (most famously against Nestle), tobacco sales, climate change, employee nondiscrimination policies, and dozen of other issues in which shareholder pressure has forced corporations to adopt new policies. Current SEC rules have established that any group or individual who holds more than $2,000 in a company's stock can petition the board of directors to take a particular action relevant to company policy. Shareholders then vote on the resolution at the company's annual meeting. Votes on the resolution are nonbinding, but high vote levels (above 20 percent) are a clear indicator for management that the issue is important to the company's owners. During the past five years, the number of shareholder resolutions that have received more than 20 percent support has increased dramatically. Further, the number receiving relatively high levels of support (5 to 15 percent) has increased even more. A number of rules guide whether a proposal can be placed on the official annual meeting ballot (or proxy). For instance, the resolution must be relevant to core business issues (meaning that it addresses operations relevant to at least 5 percent of revenues), and it must address issues relating to the economic health of the company. It cannot be used to address a grievance. During the past 20 years, these rules have been honed to such a degree that proposals are now very carefully worded documents. Shareholder resolutions that address clearly political or moral questions — proposals once easily excluded from the proxy as expressions of grievances — are now cast as business issues. For instance, a resolution this year asked Caremark Inc. to report all of the money it spent on political activities. The intent of the resolution was to dissuade the company from giving money to certain (likely to be pro-business, pro-private health care) politicians. The justification expressed in the proposal, however, however, did not dwell on the political implications of the move; instead, the document simply stated that "our company should be using its resources to win in the marketplace through superior products and services to its customers, not because it has superior access to political leaders. Political power can change, leaving companies relying on this strategy vulnerable." The resolution received more than 27 percent of the vote. Given that they are non-binding, the power behind shareholder resolutions lies in their negative value. They can be a hassle for corporate executives during the build-up to the annual meeting and a distraction from other issues once the meeting has begun. From a shareholder perspective, the goal is to get executives to conclude that giving in to activist concerns would cost far less than the distraction of dealing with a shareholder resolution. When a company has reached this conclusion, it sends representatives to meet with the activists and negotiate a resolution to their concerns. The corporate negotiators are charged with reaching a compromise before the annual meeting. The activists know the timetable, and they often press very hard to see just how much they can win before it is too late. If an agreement is reached, the proposed shareholder resolution is officially withdrawn from the annual meeting agenda. Thus, every spring brings a season of negotiation — during which activists and corporate representatives meet around conference tables, reviewing Microsoft PowerPoint presentations and trying to reach agreements. The increasing power of shareholder activism is clear both in the number of resolutions filed this year (compared to 10 years ago) and, more spectacularly, in the number of resolutions withdrawn in 2006. If anything, this plateau year has made it evident that the promise of shareholder activism is being realized: Corporations and activists are indeed sitting down and negotiating solutions. The reason for the increased number of withdrawn resolutions is the high numbers of votes that resolutions are winning. Winning Votes The increased participation of large pension funds in shareholder activist campaigns, more than any other factor, is responsible for the uptick in support for activist proposals. Until the late 1990s, a shareholder proposal was considered successful by its sponsors if it won more than 3 percent of the shareholder vote. Ten percent was almost unheard-of, and a vote of more than 10 percent would drive management to the negotiating table with activists. But 10 percent is now routine. While the votes of individuals and socially responsible investors can add up to full percentage points, the real emerging power in shareholder activism emanates from large state and city pension funds. In most cases, the pension funds' policies are made by politicians or political appointees. As the power of shareholder activism is becoming better recognized, political figures are taking notice. During the past three years, corporate annual meetings have become platforms from which ambitious state treasurers and attorneys general portray themselves as promoting the interests of the public over those of large corporations. The 2006 shareholder season brought more of the same. For instance, Richard Moore, North Carolina's state treasurer, announced May 29 that he would direct the state's pension funds to oppose the renomination to the board of directors of five ExxonMobil Corp. directors who currently have seats on the company's compensation committee. Moore argues that ExxonMobil executives are paid more than they deserve and that the compensation committee is wasting shareholder money. Ostensibly, the issue for Moore is not that ExxonMobil's management is not doing a good job — even he will grant that ExxonMobil is doing fairly well these days. Rather, he claims that ExxonMobil's recent profitability has stemmed from high global oil prices and not from any expertise that these individuals bring to the company; thus, they should not be rewarded for that profitability. In reality, Moore's ploy has little to do with ExxonMobil and even less with what its executives are paid. Explaining his position, Moore has said, "We're trying to make the point, how much is enough? … All of them went before Congress and swore to the American people, 'You may see a 40 percent increase in price at the pump, but we didn't have anything to do with it.'" He is using support for the resolution to tell North Carolinians that he too thinks gasoline prices are too high, and he will use whatever power is at his disposal to fight against the big oil companies. Moore is only one example of a state official who has used corporate annual meetings to deliver a populist message. A small, particularly active cadre of state officials — led by California Treasurer Phil Angelides, New York Comptroller Alan Hevesi and Connecticut Treasurer Denise Nappier — have become national shareholder activist leaders. They are charged to varying degrees with managing their state's finances, but they also play important roles in the management of their state employees' pension funds. These massive funds control billions of dollars and, in some cases, hold more than 1 percent of the stock in a specific corporation. This makes the pension directors powerful shareholders, and the politicians leading state pension funds become powerful forces within corporations — elevating them above the status of mere regulators. Angelides, Nappier and Hevesi, along with the New York City pension fund director, are critical allies for activists on shareholder votes, and they can be powerful advocates at shareholder meetings where they speak out in support of activist resolutions on such diverse issues as climate change, management structure, human rights and executive compensation. While the participation of large pension funds is the major cause of the increased shareholder voting levels, another is the growing number of people investing through socially responsible investment vehicles. These funds, typified by Calvert, Domini and Walden Asset Management, invest in two different ways. One method is for mutual funds to screen out certain stocks because the investment company deems the company in question to be an "irresponsible" corporate actor — with responsibility defined by primarily subjective criteria. The second major activity these mutual funds participate in is to sponsor their own shareholder proposals, or at least to vote in favor of others' proposals. Looking Ahead Shareholder activism likely will look very much the same next year as it does now, but some features of the next phase are becoming clear. Senior executives inevitably will grow accustomed to seeing proxy votes as high as 20 percent — and as they do so, the pressure they feel to come to the negotiating table alongside activists will subside. Ultimately, the number of shareholder resolutions that are presented and then withdrawn will gradually be reduced. At the same time, however, a counterpressure will develop. Shareholder activists are beginning to force mainstream mutual companies to explain (or justify) why they voted as they did with their proxies. The large mainstream mutual funds are enormous, often holding 2 to 5 percent of the stock in major companies. Recent SEC rules force these companies to publicize how they vote on resolutions, and these companies' positions easily can be held up to public scrutiny. Thus, the same political debates that capture the target corporation can ensnare the mutual fund company. Activists' desire to politicize mainstream mutual funds is, therefore, likely to be the next major battleground in shareholder activism. During the past decade, activist campaigns and the corporate responses to them have generated perceptions of some corporations as politically conservative and others as more politically liberal. There is little evidence to support these perceptions in patterns of political donations. Corporate giving is more or less evenly split between the political parties — the Republican Party holds a slight edge, 54 to 46 percent, in donations from corporate donors, but such a margin could be explained as much by its majority status in Congress as its political ideology. However, despite a dearth of convincing data, consumers often have clear perceptions that some companies — e.g., Apple Computer, Starbucks — are politically liberal and that others — Halliburton, Coors — are conservative. Mainstream mutual funds, however, probably do not want to have to worry about how they are viewed politically. Being asked publicly to choose sides in political debates, they either will begin to think about how they will avoid coming to be viewed as "political" — or else decide what political position they want to take.

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