So much for gratitude. In the past financial year, Walt Disney delivered everything you might expect from the owner of a Magic Kingdom. Bumper profits, a well-received acquisition of Lucasfilm, prospects that everyone agrees are better than ever. No wonder that shares in the entertainment conglomerate are at an all-time high. In almost any other year, Bob Iger, Disney’s boss, could have looked forward to unstinting gratitude from shareholders at the firm’s annual meeting on March 6. Instead, shareholder activists, grumbling that Disney is in danger of becoming a “tragic kingdom,” made a determined though unsuccessful attempt to strip him of one of his titles by voting to split the roles of chairman and chief executive.
Shareholders used to mount such campaigns only at firms that were performing horribly, as happened towards the end of the reign of Michael Eisner, Mr. Iger’s predecessor. (This led Disney to split the roles of chairman and chief executive, only to reverse this later, to the fury of some shareholders.) Even then, shareholder activism was rare; most investors simply did the “Wall Street walk,” selling their shares if they were unhappy.
But since the financial crisis of 2008, which revealed widespread flaws in corporate governance, shareholders have flexed their muscles more often. Public outrage over high executive pay, regulatory reforms to give shareholders greater power, and more scrutiny of how they use that power have created a climate in which even the most profitable companies can be targets of activism if their corporate governance is not up to scratch.
Apple is another striking example. In the past two years, as the consumer-electronics firm’s shares soared, shareholders still backed resolutions asking it to introduce majority voting in its election of directors. This year, as its shares fell, Apple capitulated, offering to introduce new voting rules at its annual meeting. In the end, a court blocked this at the behest of another activist investor, Greenlight Capital, which has been campaigning for Apple to return some of its cash hoard to shareholders. The hedge fund feared that Apple’s other reforms planned as part of the package would get in the way of this.
Poison pills and poisoned Apples
This year’s proxy season – named for the proxy forms by which shareholders cast their votes – could make cage fighting look tame. Activists are attacking boards, and are themselves being pummeled by critics. Martin Lipton, a Wall Street lawyer, issued a memo entitled “Bite the Apple, Poison the Apple, Paralyze the Company, Wreck the Economy,” which accused a “gaggle” of hedge funds of trying to extract short-term profits from companies without regard to the long-term consequences. Mr. Lipton has been campaigning to require quicker disclosure of institutional shareholdings and newly acquired block shareholdings. Many companies have adopted “poison pill” defenses (which were invented by Mr. Lipton). Typical pills protect managers from raiders and are triggered when a single shareholder acquires an ownership stake of 10%.
Activist hedge funds deny that they are only interested in short-term profits. They sound more plausible than their predecessors did in less-transparent times a decade or two ago. Greenlight was an investor in Apple years before its boss, David Einhorn, started agitating for better management of its cash. Similarly, last year’s intervention at Yahoo by Third Point, another hedge fund, seems to have been a genuine attempt to improve a failing firm’s long-term prospects – and may even be succeeding. While Pershing Square’s efforts to revive J. C. Penney, a retailer, are faltering, nobody thinks that is due to an excessive focus on short-term profitability.
To the critics, those activist shareholders not motivated by short-term financial gain have other dubious intentions. A recent report by the Proxy Monitor at the Manhattan Institute, a conservative think tank, found that 36% of the shareholder resolutions in 2011 to 12 were proposed by trade union pension funds. A further 31% were proposed by three wealthy individual corporate gadflies, their relatives and family trusts; 22% were self-styled “socially responsible” funds or had an explicit religious or public policy objective.
Whether the motives of the proposer matter is debatable; after all, to succeed a proposal needs to win over a majority of shareholders, most of whom are likely to be institutional investors with no agenda besides improving returns. That may explain why the proposals that attract strong support tend to be those focused on mainstream corporate-governance issues, such as majority voting in board elections, splitting the roles of chairman and chief executive, and executive pay.
In the United States, many shareholder proposals are merely advisory. Companies that have been on the wrong end of shareholder votes have reacted quite differently. Chesapeake Energy, one of last year’s top targets, introduced sweeping reforms to its corporate governance and persuaded its controversial boss, Aubrey McClendon, to retire. Citigroup also saw the departure of its boss, Vikram Pandit, although this was not directly caused by shareholders voting against his pay package last year. Still, the bank’s new top managers have been on a “charm offensive” to win shareholders’ support at this year’s meeting for a raft of complex governance and pay reforms.
CalPERS, the giant pension fund for California’s public employees, focuses its shareholder activism on the 300 firms in which it has the largest holdings. It has voted against executive pay packages at around 200 of them; significant reforms have followed at around half of those. At 50-odd firms it has voted against the pay package two years in a row. According to Anne Simpson, who oversees CalPERS’ activism, this year it and other shareholders will try to go after compensation-committee chairmen at firms that have now lost the say-on-pay vote twice. How these chairmen will react to being held personally accountable in such a public fashion will be interesting to watch.
So too will battles at several other prominent companies. Following allegations of corruption by Wal-Mart in Mexico, some shareholders of the giant retailer hope to unseat any members of the board’s audit committee who were in office when the alleged bribes were paid. The reported acquisition of a 6% stake in Dell by Carl Icahn, the grand old man of activism, shows the growing resistance among shareholders to Michael Dell’s plan to take the computer-maker private, at least without raising the price. And following the write-off of billions of dollars that Hewlett-Packard paid to buy Autonomy, a British software company, shareholders may even try to vote out the computer firm’s auditor, Ernst & Young. That would be a milestone for activists.
The next few months will be a crucial test of their ability to turn discontent into real change. One thing seems certain: the days of guaranteed boredom at annual meetings are gone.
© The Economist Newspaper Limited, London (March 9, 2013)