VideoIn the old days, back before Sir James Goldsmith and greenmail and merger mania, shareholders were a quiet, unobtrusive lot. They followed the ups and downs of the market, rarely attended annual meetings, and dutifully filed company announcements in the trash. Proxy battles were like volcanoes in Wisconsin — few and far between. Recalls Harvey Pitt, former chairman of the Securities and Exchange Commission: "I grew up in an era when shareholder proposals barely got a 2 percent vote."
These days, shareholders have pumped up the volume considerably. Spurred by a slew of portfolio-punishing accounting scandals — and angered by decades of corporate indifference to their requests — institutional investors have gone on the offensive, pushing agendas and getting in the face of corporate executives. According to the Investor Responsibility Research Center, shareholders filed some 1,126 proposals with corporations this year. In 2002, that number was closer to 800.
In fact, observers say this year's annual general meetings were more like open season than proxy season, with institutional investors targeting big game. In Minnesota, Gov. Tim Pawlenty turned Pfizer Inc.'s annual meeting into a media circus, pillorying the company for pricing its products above the rate of inflation. Another pension-fund-led campaign, this one against directors at Federated Department Stores, netted a whopping 61 percent withhold vote — even though Federated has outperformed its peers for five years running. Observes Espen Eckbo, founding director of the Center for Corporate Governance at the Amos Tuck School of Business at Dartmouth College: "It's a new world [for officers and directors], whether they like it or not."
Apparently, some don't. According to a new survey conducted by CFO magazine, finance executives appear dismayed by the new investor radicalism. Fifty-six percent of the respondents said dealing with shareholder requests has become a distraction. Fifty-three percent indicated they're spending more time with shareholders than ever before, yet only 11 percent of the executives polled believe that adopting the recommendations of the shareholder activists will improve their ability to create value for those investors.
In truth, many executives appear to have been soured by the actions of a few high-profile groups. The California Public Employees' Retirement System (Calpers), the world's largest pension fund, for example, withheld votes on one or more directors at an astounding 90 percent of the 2,700 companies it holds in its $180 billion portfolio. The hit list included even such pillars of virtue as Coca-Cola director Warren Buffett, long an advocate of shareholder rights. Likewise, Institutional Shareholder Services (ISS), a proxy-services firm that advises institutional investors on how to vote their proxies, told clients to remove Buffett from Coke's audit committee, citing a conflict of interest. Pitt, now CEO of Kalorama Partners, in Washington, D.C., was taken aback by the Buffett bashing. "When you start attacking Warren Buffett," he says, "you've gone off the deep end."
Such chutzpah has not gone unnoticed by the SEC, which is currently reconsidering a watershed proposal to give shareholders direct access to board nominations. The reason? "The strident tactics of Calpers and ISS during the recent proxy season," says one corporate director.
Moreover, the new level of activism practiced by such groups is fundamentally altering the relationships between shareholders and executives. "What's happening is it's 'us and them,' " reports Craig Nordlund, senior vice president, general counsel, and secretary for Palo Alto, California-based Agilent Technologies Inc. But Patrick McGurn, senior vice president and special counsel at ISS, believes such divisiveness is a symptom, not a cause. After the Buffett incident, "we were called idiots," he says. "But if that's the tenor of the debate the corporate community wants to have, that's a sign of a bigger issue."
Send 'em the Bedbug Letter
The budding radicalism of investors is hardly surprising. Investors may be the owners of companies, yet they've rarely been treated as such. Shareholder proposals — which are nonbinding — have been blithely ignored by many corporate boards. In some cases, managers have regarded vocal stockowners as meddlers or, worse, interlopers. "Somehow we've lost sight of the fact that with ownership comes certain prerogatives," says Pitt. "And one of those prerogatives is to be treated as if your views are important."
The high number of dead (uncast) proxy votes, though, has led many companies to pay lip service to investors. Since in the past 60 percent of proxy votes were dead, notes Eckbo, "the culture of top management has been, 'We don't have to pay attention to those guys.'" That sort of thinking, of course, led to the scandals at Enron, Tyco, and WorldCom, where managers treated their companies as personal fiefdoms — and vaporized billions of dollars in shareholder value in the process. "Anything that can change this mind-set is good," argues Eckbo.
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