Stand-up shareholders

  • Business
  • Saturday, 08 Mar 2003



WHEN stock prices soared in the late 1990s, shareholders were mostly a complacent lot. But a raft of corporate scandals that battered portfolios and investor confidence has led to increased shareholder activism.  

The annual meeting season in the US is about to kick off, and already the number of shareholder resolutions dealing with corporate governance, such as executive pay and board elections, has reached a record 680, up from 529 for all of last year, according to the Investor Responsibility Research Centre’s survey of about 2,000 companies.  

“Shareholders feel they need something to happen now,'' says Tracey Rembert, coordinator for the Shareholder Action Network, a shareholder advocacy clearinghouse. “They have sat back the last two years and seen the market collapse, saw investor confidence completely plummet and waited for regulators to do something.''  

Companies are more inclined to listen now, too.  

“The time is absolutely ripe to hold companies accountable,'' says Nikki Daruwala, senior analyst and coordinator for shareholder advocacy for the Calvert Group in Bethesda, Maryland. “That once arrogant, 'Oh, we are XYZ and an S&P 500 company, don't bother us,' attitude is no longer there.''  

Calvert, which offers 17 socially responsible mutual funds among others, had submitted 20 shareholder resolutions. It has since withdrawn some because companies have responded.  

The old stereotype of shareholder activist is the gadfly who rambles on at annual meetings, attempting to irritate or embarrass management. That tactic still exists, but there are other ways for small shareholders to be heard. Here are suggestions:  

File a resolution. It's too late to propose a resolution for this spring. But there is still time to file a proposal for annual meetings later this year, or to prepare one for next year.  

To file, an investor must own US$2,000 in stock, or 1 per cent of shares, whichever is less, for at least a year.  

The rules for filing are strict, and failing to follow them could give a company an excuse to toss a proposal. For example, resolutions and supporting statements must not exceed 500 words and must not deal with “`ordinary business.'' So, a term paper advising McDonald's to stop selling burgers won't fly.  

Vote. If you own stock directly, you can have a say in how the company is run by voting your shares. Those who cannot attend the annual meeting can vote by proxy. Companies mail out proxy statements and ballots weeks before the meeting.  

Even if no resolutions are on the ballot, investors will be asked to elect directors. Half the time, too, shareholders get to vote on the auditor.  

“Always vote. If you don't vote, you don't have any reason to complain,'' said Charles M. Elson, a professor at the University of Delaware.  

While small shareholders have less influence than a mutual fund voting millions of shares, their impact shouldn't be underestimated, Elson says.  

“You saw that in the presidential election in Florida, and certainly see it in proxy fights right now,'' he says.  

Investors last year narrowly approved the mega-merger of Hewlett-Packard Co and Compaq Computer Corp by a 3 percentage-point margin. “ 

Every vote counted,'' Elson said.  

When voting for directors, look for outsiders who do not have a relationship with the company or management, experts say.  

The New York Stock Exchange has proposed rules for its members that would require a majority of the board members to be independent.  

Elson prefers only one inside director, usually the chief executive.  

Read the proxy statement to gauge directors' commitment. Do they own a sizable amount of the stock, and thus more likely to keep shareholders' interest in mind?  

Do they sit on too many other boards and won't have time for another? Do they miss many meetings?  

If you don not want to vote, at least send in your ballot noting you abstain, so management cannot vote your shares for you, says Rembert of the Shareholder Action Network.  

Check mutual fund voting. Many investors own stock through a mutual fund, which has authority to vote shares on behalf of investors. Under a rule recently approved by the Securities and Exchange Commission, funds must begin disclosing their proxy voting policies after June 30. By the end of August 2004, they must reveal how they voted the prior year.  

Some funds already disclose their votes. If a fund does not, ask for its voting policy or how often it votes against chief executive officer pay plans, says Nell Minow, editor of the Corporate Library, an Internet corporate governance resource.  

“If you can put pressure on the guys voting the big block of stock, then that is meaningful,'' she said. “If they say, 'We don't disclose until we have to,' you have to ask yourself what are they afraid of.''  

Attend the annual meeting. The meeting is for shareholders, so go and ask pertinent questions, experts said. “Question management. That's rule No. 1,'' Rembert said. “The boards haven't been doing a good job of that in recent years.''  

If the meeting is too far away, you can send someone else in your place by following certain procedures. – LAT-WP  

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