Answer: shareholders.
Motivated to be heard in the post-Enron age,
shareholders are flexing their muscles, demanding
responsible policies and practices in unprecedented
ways. And though some still feel like second-class
citizens behind executive elites, shareholder activists
are reporting new receptivity to their causes thanks,
they say, to a scandal-charged atmosphere that has
management humbled and listening.
"The embarrassment of the scandals is leading
companies to talk," says Daniel Rosan, director of
public health for the long-time shareholder activist
network, Interfaith Center on Corporate Responsibility.
"Savvy companies have realized that shareholder concerns
are a kind of feedback they need."
The chief barometers of shareholder activism indicate
the movement has reached new heights since the wave of
corporate scandals began in 2002. In that year,
shareholders brought 802 proposals to a vote at company
annual meetings, according to tracking data from the
Investor Responsibility Research Center. In 2003, that
number jumped to 1,082. So far this year, a record 1,147
proposals have been made as the five-month proxy season
winds down this month.
What's more, shareholder proposals once regarded as
voices crying in the wilderness are now receiving more
votes. A record 161 proposals won majority support from
shareholders in 2003. That record could be broken this
year.
What shareholders want ranges from limits on chief
executive officer pay (the most common proposal) to
nondiscrimination policies that include sexual
orientation. Although they are nonbinding, resolutions
commonly work by bringing unwelcome public attention or
even shame upon a corporation.
Influencing Corporate Policy
Beyond resolutions, however, lies an array of other
tools in the shareholder activist's toolbox. And what
activists find most inspiring about the current climate
is the potential for influencing corporate policy
without going the resolution route.
"I don't like to use shareholder proposals because
you're starting out in a combative position," says Frank
Rauscher, president of Aquinas Funds, a mutual fund for
advancing Roman Catholic social causes. "We've been very
successful, especially in the past few years, through
dialogue alone." For example, the fund company sent a
letter to Merck & Co. management outlining the
liabilities potentially associated with the manufacture
of the RU-486 "day after" abortion pill. That was all it
took to obtain a statement that the company would not
manufacture it, Rauscher says.
Since shareholders own portions of public companies,
each has a right to vote on nominations for boards of
directors and other proposals presented at annual
meeting. Proxy forms sent in the mail enable
shareholders to vote without attending in person. What's
more, anyone who owns $2,000 or more in stock can,
according to the Securities and Exchange Commission,
draft and present a proposal for consideration by all
shareholders.
In general, proposals aimed at social or corporate
governance issues come from attorneys or specialized
firms hired by major institutional investors, such as
universities, unions, or state pension funds. But
individual investors are making their voices heard as
well by teaming up with coalitions of like-minded
investors and using collective clout to advance their
agendas.
It often works like this: An individual investor
brings personal concerns about board-member independence
or a firm's political contributions, for instance, to an
investor networking organization, such as the Advocacy
and Public Policy Program (www.shareholderaction.org).
There, he or she learns how others such as mutual
funds or Calpers, the giant California pension program
with $165 billion invested plan to vote at a
particular company's annual meeting. They can also learn
who, if anyone, is leading the charge. If a campaign has
already begun, the investor might become a signatory to
a petition, a proxy voter, or possibly even a
participant in meetings with management. Out of such
steps or other creative means to reach the right
corporate decision makers, an activist is made.
Increased Proxy Voting
Many shareholders who never bothered to vote their
proxies and instead by default affirmed management's
plans have seized a new role since the collapse of
Enron. In Maine, for instance, State Treasurer Dale
McCormick promptly instituted proxy voting guidelines
for companies owned through the state's $7 billion
pension fund. And for the ordinary Maine investor
outraged by corporate fraud, McCormick has answered a
call for lessons in activism by writing how-to articles
for the general public.
"The annual shareholder meeting is the one time of
the year when shareholders get access to the board of
directors and management," she says. "We have a big role
to play in cleaning up the corporate scandals, and
you're either part of the solution or part of the
problem. You're part of the problem if you're letting
someone else vote your proxy."
Still, the $64,000 question persists: Does it work?
Do shareholder voices actually lead to new corporate
policies? On that question, the jury is still out, since
management sometimes takes years to respond to
shareholder concerns. But signs do suggest more movement
than five or 10 years ago.
On one hand, management has yet to respond to certain
new pressures. In notable examples from the current
proxy season, 37 percent of shareholders of the oil
exploration firm Apache Corp. demanded a report on the
company's efforts to reduce greenhouse-gas emissions. At
the Fifth Third Bancorp annual meeting in May, 63
percent of shareholders called for a nondiscrimination
policy toward gay and lesbian employees, despite
management's silence on the issue. Whether executives
will act on these shareholder directives remains to be
seen.
Claiming Victory
But in some cases, shareholders are already claiming
victories. American Electric Power Co., for instance,
apparently heard the voice of investors, led by
Connecticut Treasurer Denise Nappier, who demanded in
2003 more disclosure about the company's impact on
global warming. This year, under pressure from another
pending shareholder resolution, the company agreed to
let an independent committee oversee a report. Satisfied
shareholders withdrew their proposal.
"Typically the annual meeting has been a 'rah-rah'
event for the company and for management," says Tracey
Rembert, advocacy director for the Social Investment
Forum. "Some [firms] don't take shareholders very
seriously, but more and more are finding they need to."
With shareholder activism still in its infancy as a
movement, investors are discovering by trial and error
what works most effectively. Shareholders with a light
touch, Rembert says, find that handwritten letters have
at times prompted six or eight-page responses from
executives. And for those who prefer the stick to the
carrot, Rauscher says shareholders are beginning to
discover the potential for lawsuits against management
when those in charge convey "misleading information" on
social issues or other matters.
Whether the gentle approach ultimately gets further
than the tough one is not yet clear. But in the
meantime, Rauscher expects investors to keep seeing
encouraging signs. "Social activists are realizing the
big institutional investor might vote for a CEO pay
limit and take the rest of the little guy's proposal
[with social concerns attached] along with it," he says.
"You just might find it gets approved."
