Shareholder Advocacy in High Gear

The scandals that have rocked corporate America during the last several years have produced a lot of fallout at manufacturing companies, not the least of which is a rise in shareholder determination to reform business. "2003 will be remembered as a year when investors decided to stand up and be counted," proclaimed Timothy Smith, president of the Social Investment Forum, a national trade association for the social investment industry, and senior vice president of Walden Asset Management, at a press briefing earlier this year. "This is an important trend . . . . Investors are moving from passive holders of stock to becoming active and responsible owners, taking their ownership responsibilities seriously." For example:

• As of mid-April, some 998 shareholder resolutions had been filed for the 2003 proxy season at the more than 2,000 widely held U.S. companies tracked by the Investor Responsibility Research Center (IRRC), a Washington, D.C.-based firm that provides independent research on corporate governance and proxy voting. That number is up sharply from the 802 resolutions filed in all of 2002, with three-quarters of the 2003 resolutions tied to corporate governance and another quarter tied to social and environmental issues. Nearly one-third are linked to executive pay.
• On April 28 GlaxoSmithKline PLC announced it would slash the price it charges for HIV/AIDS drugs in developing nations. This decision came on the heels of pressure by investors such as the California Public Employees' Retirement System (Calpers) to make such a move. Calpers reports assets of about $131 billion.
• At Verizon Communications Inc.'s annual meeting in April, shareholders approved a resolution requiring the New York-based telecommunications firm to get shareholder approval for severance packages of 2.99 times or more of an executive's base salary plus bonus. Similar measures passed at the Hewlett-Packard Co., Palo Alto, Calif., and Tyco International Ltd., Pembroke, Bermuda, while shareholders of General Electric Co. in Fairfield, Conn., narrowly defeated the measure.

To be sure, there are many reasons to dismiss as unimportant the increasing numbers of resolutions filed in 2003. Not all make it to a shareholder vote: Some are withdrawn by sponsors; others are dismissed by the Securities and Exchange Commission. And just 33% of all shareholder proposals voted on last year received more than 50% of the votes cast, according to the IRRC. Many receive far less. More importantly, since shareholder resolutions are non-binding, companies aren't required to act on them even when they do garner a majority vote. However, they can bring unwelcome scrutiny to a company. Calpers, for example, was one of several large institutional investors and labor unions that took out a full-page ad in the Wall Street Journal prior to Tyco International annual meeting this year, urging the company to reincorporate in the U.S. Despite the public pressure, a shareholder resolution calling for reincorporation roundly failed. However, Calpers and a co-sponsor subsequently withdrew a similar proposal directed at energy services firm McDermott International Inc., incorporated in Panama, after the company agreed to examine the issue once its Babcock & Wilcox Co. operation emerges from bankruptcy proceedings. And, like Calpers, many of the shareholders aren't disenchanted individuals but investment funds and organizations that represent large numbers of dollars, and which advocate high standards of corporate and social responsibility. The combined portfolio value of the Interfaith Center on Corporate Responsibility, a New York-based association of 275 faith-based institutional investors, for example, is estimated at $110 billion. The Teachers Insurance and Annuity Association College Retirement Equities Fund (TIAA-CREF) New York, reports to have $259 million in assets under management. "If you look over the past 10 [or] 15 years, the big pension funds have certainly gotten more active in talking to firms about their concerns, chiefly about corporate governance," says Dennis Sheehan, professor of finance at Pennsylvania State University's Smeal College of Business, University Park, Pa. In many instances they aren't interested in divesting their positions with the big companies, he says. "I think they now see that the alternative, which had once been viewed as just being quiet, is not their only alternative." Data show that increasing determination by shareholders to hold companies accountable has taken a financial toll. Directors and officers (D&O) liability insurance has risen sharply in recent years, due in part to shareholder litigation. According to a recent survey by management consulting firm Tillinghast Towers Perrin, purchasers of D&O liability insurance paid nearly 30% more for the coverage in 2002 over the previous year, with increases reflecting "continued concern over high-profile bankruptcies, corporate scandals and D&O lawsuits, particularly securities and shareholder litigation."