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Investor activism has been on the rise for several years, and shareholders at many companies have grown accustomed to wading through picket signs to hear what management has to say. But many companies are still unsure how to deal with their critics: should they engage them, ignore them, or run and hide? If they choose engagement, is the annual meeting really the most effective forum for meaningful dialogue?
Those questions are more important this year because there are more questions being asked of more companies than ever before.
“The 2002 proxy season is unusual,” says Timothy Smith, national trade association chairman of the Social Investment Forum. “Enron reminded us all how auditors and directors are so important.” Activist investor say corporate executives are more willing to enter into dialogue—rather than simply dismissing shareholder resolutions out of hand—and that pension funds that one supported management reflexively are considering their votes more carefully.
A study by the Investment Responsibility Research Center and Social Investment Forum indicate an Enron backlash and rising investor support for proposals to improve corporate oversight and encourage more attention to social concerns. Among the survey’s highlights:
Of 712 shareholder resolutions filed so far in 2002, 428 focus on such corporate governance issues as separating auditor work from consulting work; assuring outside directors on boards’ compensation and audit committees stay strictly independent of the company they oversee; and making sure executive pay truly reflects the performance of the company. 261 of the 712 resolutions focus on corporate responsibility issues. The fastest-growing category is global warming, with 18 resolutions at companies such as Eastman Chemical, ExxonMobil, General Electric, and Sprint. The other hot button among resolutions this year is convincing companies to monitor and influence the labor practices of foreign factories that produce their goods.
Some shareholder resolutions clearly relate directly to the Enron mess. Walt Disney Co., for example, faced a resolution for the company to stop awarding lucrative consulting and auditing work to the same accounting firm. It failed to pass, but it earned a remarkably high 42 percent of the vote, and the firm later agreed to the separation.
“The sudden and total collapse of the seventh-largest company in the United States will forever change the way shareholders look at corporate boards,” says Pat McGurn, director of corporate programs for Institutional Shareholder Services. “Enron will elevate some second-tier proxy issues, such as auditor independence and rotation, to front-line status.”
Companies such as Avon Products, AT&T, Boeing, Ford and General Motors all face shareholder proposals seeking tougher governance measures to discourage boardroom cronyism and keep key board committees independent from corporate influence.
Elliot Sloane, president of New York public and investor relations firm Sloane & Company, says many companies are facing votes on whether they should retain Andersen as their accounting firm—and in most cases, they will not. “Another big issue has always been executive compensation,” says Sloane. “It’s going to be harder this year for companies to push creative executive compensation packages, particularly if the company’s stock price has withered in the past few months.”
And if you think there’s more activity this year, wait for last year. Susan Michels, of investor relations firm FRB Weber Shandwick, says that while the media is clearly paying more attention to proxy issues this year, the real surge in activism may not be seen until this time next year.
“This activism that has been going on for years, but often behind the scenes, and it now receives much more publicity than before,” says Michels. “Governance and activism are more front page news read by all investors, and not just board-room events we may see increasing levels as well as publicity of activist efforts in the future, coming from an expanded pool of investors/potential activists.”
Michels says the deadline for many shareholder proposals fell before the collapse of Enron. She expects the major increase in shareholder proposals in 2003.
That has to be cold comfort to the significant number of companies that have already faced loud demonstrations and difficult questions.
Philip Morris, of course, is no stranger to protests, although it attracted additional scorn this year because of its plans to change its corporate name. A demonstration organized by the ubiquitous Infact, which led boycotts against Nestle in the 70s and GE in the 80s, featured dozens of activists wearing masks and holding a giant canvass depicting the Marlboro Man as a skeleton, wearing a red bandana with the Altria logo, while others entered the meeting to confront the corporation’s top officers directly.
Says Infact executive director Kathryn Mulvey, “The corporation has been promoting new CEO Louis Camilleri as a diplomat rather than a gunslinger, but people around the world are watching to see how this new leadership moves the corporation away from its history of deceit and death. Activists have traveled far and wide to come here today to let Mr. Camilleri know from the start that Altria can’t hide the Marlboro Man’s global rampage. The time has come for this corporation—whatever it calls itself—to retire the Marlboro Man.”
Coffee may be less controversial than tobacco, but that doesn’t mean Starbucks’ annual meetings are any calmer than those at Philip Morris. This year, protestors waved signs proclaiming, “Mocha is Slavery,” and “Espresso Kills Birds.” The protestors argued that Starbucks executives have gotten rich exploiting poor coffee pickers. “The coffee industry is one based on the super-exploitation of Third World farmers, many of whom live in dire poverty, at the mercy of the weather and a fluctuating market, whilst speculators and corporate heads make obscene profits,” according to Stuart Munckton, writing in Green Left Weekly.
Activists claim new higher-yielding coffee plants in Central America and the Caribbean have led to deforestation, harming the habitat of many indigenous birds. And they claim chocolate flavoring is produced by slave labor on the Ivory Coast.
New General Electric chief executive Jeffrey Immelt, meanwhile, was welcomed with a long list of shareholder proposals. Some activists want GE to adopt a policy that would allow shareholder to vote on any attempt by an outside company to acquire the company—an unlikely prospect—and that the company should get shareholder approval before adopting poison pill provisions. Meanwhile, the religious order Sisters of St. Dominic wants GE to disclose how much it has spent to fight the EPA’s demand that it clean up PCBs in the Hudson River. Other proposals will focus on issues ranging from nuclear power and global warming to executive compensation and severance pay.
Activism has even taken on an international flavor. At the annual meeting of Vivendi Universal, chief executive Jean-Marie Messier was repeatedly heckled by protesters calling for his resignation, while riot police stood guard. Many of the protestors were employees of Canal Plus, Vivendi’s pay television unit, angered by the dismissal of the unit’s former CEO. Some were driven by the company’s huge net loss and its failure to articulate a clear strategy, while others worried that it was losing its identity as a French company, and planning to relocate its headquarters to the U.S.
Meetings such as these are not much fun for management, but many investor relations people believe increased activism is good for companies and good for governance. Just as democracy works best when citizens are actively involved in the political process, capitalism works best when investors are participants rather than passive observers.
“There is a sense among institutional investors that we were not sufficiently vigilant during the bull market and that we allowed CEOs and other top executives to take home a larger share of the pie than was appropriate-especially in the form of stock options,” says Beth Young, a corporate governance consultant for the AFL-CIO. “Now, having seen the value of their investments plummet, shareholders are looking to make sure that executives who touted stock options as a way to tie their fortunes to the shareholders’ are not figuring out ways to get paid more.”
Says Joshua Hochberg, who heads the investor relations practice at New York-based Vistance Group, says, “It’s absolutely Enron related, and I think it’s a good thing. Individual investors are taking more of an interest and becoming active shareholders.”
On governance issues, however, they need to temper their enthusiasm for reform with an understanding that it won’t happen overnight.
“It’s one thing to be on the alert for bad practices,” says Hochberg. “On the other hand, investors have to allow time for strategy to develop. Vivendi is a good example. It’s hard to take politics out of the equation, but it’s obviously going to take time to take what was a French water company and turn it into a global media conglomerate.”
Having said that, the vast majority of activist proposals—particularly those dealing with social issues—are roundly defeated, raising the question of whether companies should just ignore them.
“Most of the noise comes from shareholders who can’t influence the vote one way or the other,” says Sloane. “At most companies, institutional shareholders hold 70 to 80 percent of the stock, and management may hold a large chunk of stock. When activist institutional shareholders like Calpers are unhappy, they don’t picket the annual meeting, they make their case quietly and very effectively behind closed doors.”
But that doesn’t mean companies can safely ignore their critics, many of whom raise legitimate issues and have influence—in the media and political realms—beyond their mere numbers.
“We don’t file to get super high majority votes,” says Adam Kenzer, director of shareholder activism at Domini, a leading social investing fund. “Traditionally corporations hear from shareholders that they want more profit and higher growth—period, end of sentence. We want to make sure that corporations know that shareholders are concerned about other aspects of corporate performance.”
So companies need to prepare particularly carefully for this year’s annual meeting, to make sure they have satisfactory answers to likely questions dealing with both financial and social performance.
“Managements of companies that have had a major layoff or [have] seen their stock price drop sharply—a fairly large universe now—need to think hard about what they will say to shareholders at this year’s annual meeting,” John Wilcox, vice chairman of Georgeson Shareholder Communications, told Chief Executive magazine earlier this year.
The first thing companies can do to protect themselves, says Michels, is “know who owns them, and why.”
“Companies should see if they have a ‘good governance’ story,” she says. “If not, why not? And what can they do about it? Improve their board and committee composition and structure, greater independence of directors, auditors, etc). Are they effectively telling this good governance story? Are their financials clear and understandable? If not, they are going to be penalized in the marketplace.”
The bottom line is that shareholders are demanding increased transparency. “In the long run, shareholders are looking for more transparency,” says Hochberg. “Companies need to be clear about their strategy, and shareholder meetings are a great opportunity to show every move they make, to practice what we call hyper-transparency.”
“Companies are taking a new, hard, and more objective look at themselves to see if their financial structure and reporting are reasonable and accurate,” says Michels. “Even the perception of overly complicated financial structures, and less than fully transparent financial reporting, have significant adverse effects on stock value and future marketability of the company.”
Having said that, there are limits on how much a company can achieve at its annual meeting, and whether it’s the right forum to address all these issues.
“The annual report is a ritualistic event, and traditionally companies try to control it as much as possible,” says Al Geduldig, a partner at Geduldig & Ferguson in New York. “It’s not the best forum for interactive communication. It’s generally a one-way communication event, with limited time for questions and answers. You don’t want it to degenerate into a donnybrook.”
That means that while companies need to provide a forum for investors—including critics—to raise questions of concern, they should recognize that deep-rooted problems are not going to be solved at a public meeting.
“This is a forum for shareholders to get up and ask questions,” says Sloane. “In most cases you know what the questions are going to be—it’s very unusual that a question comes completely out of left field and takes you by surprise—and you can prepare management with the answers they need to give, to appear thoughtful and forthcoming. You put a time limit on how much time any one individual can speak, and on how much time management will devote to an answer, and if at the end a shareholder is not happy with that answer, that’s just how it goes.”
Facing those questions in a public forum may be uncomfortable, or even embarrassing, but it is part of a CEO’s job. Companies that fail to embrace transparency are likely to be punished by the markets. Caterpillar, for example, has been widely criticized by shareholders for the way it conducted its annual meeting.
With the exception of chairman and CEO Glen Barton, none of Caterpillar’s 14 directors attended the company’s annual meeting. The company skipped any discussion of last year’s results or the outlook for this year. During an informal Q&A with the few dozen shareholders who attended the meeting, Barton defended the absence of his fellow board members and implied he would have canceled the meeting altogether if he could.
Says stockholder activist Nell Minow, “It is arrogance of the highest order of magnitude for directors not to attend.”
“Public companies need to be public,” says Sloane. “That doesn’t mean you have to hold your annual meeting in the middle of Times Square, but it doesn’t mean holding it out in the 518 area code either. There is nothing wrong with rotating the annual meeting to several locations, particularly if you have operations in several cities and you want to get employees involved, but it should always be accessible.”
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