Corporate Research E-Letter No. 36, June 2003
CONFRONTING COMPANY POLICY:
THE GROWING POWER OF SHAREHOLDER ACTIVISM
by Philip Mattera
This year’s annual meeting of cosmetics maker Avon Products was the scene of a small but significant revolt against the status quo in corporate America. More than 80 percent of the votes cast by shareholders were in favor of a resolution opposed by the company’s board of directors. The resolution, which was submitted by socially responsible investment firm Walden Asset Management, was on a basic issue of corporate accountability: the election of all directors on an annual basis.
The confrontation at Avon was not an isolated event. Shareholders are seeking to influence corporate policy more than ever before. According to the Investor Responsibility Research Center (IRRC), a record 1,083 shareholder resolutions have been filed this year. At General Electric, whose annual meetings, as the New York Times put it, “were once seen as virtual love-ins,” there were 13 proposals on the ballot.
Most of the resolutions are being proposed by organizations that have a track record in the area. Yet a substantial number are coming from individual shareholders who are angry at widespread revelations of corporate fraud and at executive compensation that remains lavish in the face of sagging stock prices. At Delta Air Lines, a pilot submitted a successful resolution calling for limits on the generous severance packages known as golden parachutes. “Shareholders are saying, ‘I’m mad as hell and I’m not going to take it anymore,’” one activist told Business Week.
ABANDONING THE RUBBER STAMP
The annual meetings of publicly traded companies are purported to be examples of democracy in action. Investors are given an opportunity to elect the members of the board of directors and to vote on selected corporate policy issues. Historically, however, this was not a very meaningful form of participation. Board members usually ran unopposed, and investors were expected to rubber-stamp company resolutions that served mainly to enrich and entrench directors and Top management. It is telling that the election material mailed to investors in advance of the annual meeting is called a proxy, since it includes a document enabling shareholders to give management the right to vote their shares. Most individual investors accepted that dubious option. Many institutional investors – the pension funds, mutual funds and money managers that control the lion’s share of stock in most large corporations -- also paid little heed to proxy voting.
That indifference to corporate policy issues is rapidly disappearing. Institutional investors, in particular, are paying much more attention to proxy issues and are increasingly likely to vote their shares. They are also more inclined to support shareholder resolutions and they no longer automatically support proposals from management. Following the lead of the California Public Employee Retirement System (CALPERS), some state public pension funds are themselves becoming activists. This year, for example, the Treasurer of Connecticut, who oversees the state’s pension funds, joined with religious investor activists in filing resolutions on global warming at five large electric utility companies.
GOVERNANCE AND RESPONSIBILITY
Shareholder resolutions can be divided into two broad categories: governance and social responsibility. Governance (which accounted for 772 of this year’s resolutions) covers matters such as procedures for electing the board of directors, separation of the chief executive and chairman positions, and executive compensation policies. Social responsibility resolutions (311 this year) run the gamut from employment practices to environmental compliance to predatory lending. This year, one of the biggest issues is global warming, with 26 resolutions filed.
Broadly speaking, social responsibility resolutions are the domain of religious denominations, which have been active in this field for more than 30 years. Operating under the aegis of the Interfaith Center on Corporate Responsibility (ICCR--not to be confused with IRRC), these denominations played a key role in challenging corporate America over its investments in South Africa under apartheid and went on to campaign on concerns such as nuclear weapons production, labor practices in the Third World and employment discrimination in the United States. The religious denominations often work in tandem with socially responsible investing firms such as Domini Social Investments and Trillium Asset Management.
Corporate governance resolutions were once almost exclusively the realm of the big public pension funds, but a steadily increasing number of these proposals are being introduced by union-controlled pension funds (380 this year alone). In 1978 Jeremy Rifkin and Randy Barber called on the labor movement to use its pension muscle in their much-discussed book The North Will Rise Again, but it was not until the mid-1990s that unions entered the fray in a serious way. Since that time, the AFL-CIO and some of its largest affiliates – such as the Service Employees, the Teamsters and the public employee federation AFSCME – have become active proponents. In 1998 the Hotel Employees and Restaurant Employees International Union, working with CALPERS and other public pension funds, scored a major coup when they blocked a management proposal at Marriott that would have magnified family control of the company at the expense of other shareholders through the creation of a dual-class stock structure.
Sometimes union funds target companies involved in labor disputes, as with the governance resolutions filed at Oregon Steel Mills in 1999 after striking workers at one of the company’s plants were permanently replaced. Yet most of the resolutions are simply part of the labor movement’s general campaign for corporate accountability.
Union funds may also offer resolutions that combine governance and social responsibility issues. AFSCME, for instance, joined with the Connecticut State Treasurer this year in offering a resolution calling on Ingersoll-Rand to move its domicile back to the United States from Bermuda, where it had reincorporated as a way of avoiding U.S. corporate income taxes. The proposal did not succeed, but it received an impressive 41 percent, which belied management’s earlier claims that shareholders overwhelmingly supported the Bermuda gambit.
PLAYING TO WIN
Shareholder activists are not only introducing more resolutions, but these proposals are receiving substantially higher levels of support. It was not long ago that shareholder resolutions were hard pressed to receive 3 percent, the minimum required for a new proposal to be reintroduced the following year (the threshhold goes up to 6 percent the third year and 10 percent after that). Most shareholder activists never expected to win a vote; their goal was mainly to receive publicity for the issue being addressed. Or else they took advantage of management’s desire to keep embarrassing issues off the ballot by agreeing to withdraw a resolution in exchange for negotiations with the company that sometimes led to significant reforms.
Today it is no longer rare for resolutions to win majority support. According to IRRC, about 100 resolutions got more than 50 percent of the vote last year, up from 66 the year before. This year’s results are still being tallied, but it appears that the number of wins will be impressive once again.
Nearly all of the resolutions that win majorities are in the governance category, a result of the fact that many mainstream institutional investors are now willing to vote for such measures. Support levels for social responsibility resolutions are significantly lower, but they have been on the rise as well. Last year, about 20 social responsibility resolutions tracked by ICCR received 16 percent or more, a level the Center defines as “exceptionally high.” Already this year, environmental proposals have received more than 20 percent at companies such as American Electric Power, ChevronTexaco, ExxonMobil, Southern Company and Texas Utilities.
At Dover Corp., a resolution prohibiting employment discrimination on the basis of sexual orientation received 43 percent. A similar proposal at J.C. Penney got 93 percent, but that was a rare instance in which the board of directors supported an outside resolution.
THE NEW FRONTIER
As impressive as the advances of the shareholder movement have been, it should be kept in mind that the resolutions, even when approved by a majority of votes, are not binding on management. This is not to say that management ignores resolutions. When a proposal has substantial support, some companies will adopt the specified policy even before the voting level reaches 51 percent. This year, General Electric and Coca-Cola Co. agreed to revise controversial plans for supplemental executive pension benefits in exchange for a promise by the AFL-CIO to withdraw its resolutions on the subject.
Some activist investors are not willing to depend on the good will of management. The AFL-CIO’s Office of Investment has indicated that it plans to put pressure on companies to implement resolutions that received a majority vote. These steps could include efforts to unseat directors at the recalcitrant companies.
Board elections, in fact, are becoming the new frontier of shareholder activism. The AFL-CIO has already been targeting selected directors for reasons other than enforcement of resolutions. The labor federation has conducted a campaign to force Frank Savage from the board of Lockheed Martin because of his history as a director of the discredited Enron Corp. As a result of that campaign, 28 percent of the shares in this year’s uncontested election of directors were withheld from Savage--a substantial vote of no confidence. The AFL-CIO is also pressuring uniform services company Cintas Corp., the target of an organizing drive by the union UNITE, to establish a board nominating committee consisting entirely of directors who are not members of management.
The unions are not the only ones targeting directors. At El Paso Corp., two large individual investors sought the support of institutional investors in an effort to unseat the entire board of directors as a protest against the energy company’s failed diversification efforts. The dissident voting bloc, which included the AFL-CIO, lost by a slim margin at the recent annual meeting.
Board battles could soon become more common. The Securities and Exchange Commission is considering a plan to make it easier for shareholders to nominate their own candidates for board seats. This change, an extension of the reforms contained in last year’s Sarbanes-Oxley Act, would make contested elections commonplace rather than the rarity they are now due to the difficulties and high costs of mounting a challenge to an official slate.
Such a prospect is unnerving chief executives, who do not relish the idea of having an adversary in the boardroom. Pfizer CEO Henry McKinnell, speaking for the corporate lobbying group The Business Roundtable, submitted comments to the SEC opposing the idea of direct nominations. One of his arguments was the bizarre claim that shareholders might nominate a candidate who was not independent of management and thus potentially put the company out of compliance with stock exchange rules.
The real issue, of course, is power. Shareholder ability to nominate and potentially elect truly independent directors will have a profound effect. In his comments to the SEC, proxy voting consultant Bart Naylor called the reform “an emancipation proclamation.” Gaining seats in boardrooms will allow shareholder activism to move from a position of trying to influence corporate policy to one of helping to shape that policy.
Interfaith Center on Corporate Responsibility
Investor Responsibility Research Center
Shareholder Action Network
Center for Working Capital
Council of Institutional Investors
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