“Having told everyone in the world that there is no such thing as shareholder democracy in America, and that to change things they had to do lawsuits, I now discover I can’t even bring a lawsuit,” complains Bob Monks. Last month a judge in Massachusetts ruled that Mr Monks could not lead a class-action lawsuit by shareholders against Stone & Webster, an engineering firm, and its former auditor, PricewaterhouseCoopers, because he is a shareholder activist, and therefore not sufficiently “typical”.
It is 16 years since Mr Monks energised the corporate-governance movement by launching a campaign (which was ultimately unsuccessful) to win election to the board of Sears, Roebuck, a retailer. During that fight he bought a full page advertisement in the Wall Street Journal declaring the company’s existing board to be “Non-Performing Assets”. More recently, his focus had shifted from contesting corporate elections to trying to bring about change through litigation. After this ruling, he says he now feels “literally powerless”.
In the never-ending struggle between the shareholders and management of public companies, the disqualification of Mr Monks is but one of several recent victories for the bosses—and not just in America. On October 3rd the European Commission abandoned its long-running attempt to introduce the principle of “one share, one vote” into European law. The change would have strengthened legal protection for minority shareholders, which is notoriously weak in parts of the European Union. The prime opponents were lobbyists for big shareholders such as Sweden’s Wallenberg family, which uses special shares to retain control of the dynasty’s businesses.
In Japan a recent decision by the Supreme Court has dealt a blow to the nascent shareholder activism there. Foreign investors, mainly from America, have been putting companies under pressure to return some of their unusually large cash piles to shareholders. A prominent example is Steel Partners, a hedge fund based in New York, which since 2000 has bought stakes valued at around $3 billion in some 30 Japanese companies, including some of Japan’s best loved brands, such as Sapporo beer and Bull-Dog, a sauce company.
One government minister has accused these investors of “greenmail”, market-speak for extortion. To fight them off, Japanese firms have been adopting so-called poison pills that can dilute the shareholding of an unwelcome purchaser. Over 300 have done so this year. In August the Supreme Court ruled that Bull-Dog’s poison pill was legal, and deemed Steel Partners an “abusive acquirer”. Although a majority of shareholders generally approve of the poison pills, the result is to overturn the principle that all of them are treated equally.
It would be premature to declare this series of defeats for shareholder activists a trend, not least because the balance of power between shareholders and bosses differs markedly in America, Japan and different parts of the EU. But that could change if a few more looming battles end in triumph for management.
In Germany, for example, legislation is expected to be proposed this month that would make it easier to deem that activists who co-operate on voting are “acting in concert”, and so could require them to launch a takeover bid for a company if their combined shareholdings exceed 30%. This legislation is the latest consequence of the notorious “locust attack” on the management of Deutsche Börse, operator of the Frankfurt stock exchange, led by Chris Hohn of The Children’s Investment Fund and supported by a swarm of other hedge funds. According to a letter sent to the German government on October 8th by a British fund manager, Hermes, the change would be contrary to the United Nations’ principles for responsible investment and “would make the job of activist investors in Germany almost impossible”.
As it is, hedge-fund activists, in particular, have not been so active of late. The credit crunch has made it harder for hedge funds to borrow money to buy shares in underperforming companies. As America’s most anti-activist law firm, Wachtell, Lipton, Rosen & Katz, gloated in a recent memo: “The dark cloud of the international credit crunch…may yet have a small silver lining for public companies: the real possibility of a decline in hedge fund activism.” On the other hand, the recent evaporation of credit may also make it harder for firms to escape activists by embracing private equity.
In America battle is now being joined on several fronts. On October 9th the Supreme Court heard oral arguments in Stoneridge Investment Partners v Scientific Atlanta, a case that people on both sides of the wider debate regard as crucial. At issue are transactions between telecoms-equipment vendors, including Motorola, and a firm which then accounted for them improperly: if the vendors knew this, are they liable for the fraud?
Some heavyweight lawyers—including a former chairman of the Securities and Exchange Commission (SEC), America’s stockmarket regulator, and several of its former commissioners—fear that if the court finds that third parties are indeed liable, it will open the floodgates for litigation. In that case, “scheme liability” as it is known, might seriously reduce the competitiveness of American business. Mr Monks, on the other hand, sees the case as a test of whether American authorities can prevent the issuance of securities based on false information.
The SEC is also at the heart of another battle over the procedures for changing companies’ bylaws on elections to their boards. On October 2nd it completed consultations on two proposed rules: one that would allow companies to omit suggested changes to their bylaws from the “proxy” ballot sent to shareholders who do not attend annual meetings, and one that would oblige companies to include them.
Institutional investors protest that not even the second rule goes far enough. But opponents of shareholder activism argue that any expansions of shareholders’ rights should be rejected in order, in effect, to save shareholders from themselves. More shareholder democracy, these critics believe, leads inevitably to less shareholder value. If such condescending arguments are being taken seriously, no wonder activists such as Mr Monks feel so despondent.