Activist Shareholders Spur Growth of a New Kind of Advice Industry : Investing: Specialty firms offer research services on a broad range of issues.

The rise in activism by pension funds and other institutional shareholders has spawned a new cottage industry that provides information, analysis and even advocacy guidance to big investors on issues ranging from apartheid to mergers.

The firms run the gamut from the impartial, nonprofit Investor Responsibility Research Center (IRRC) in Washington to Providence Capital Inc., a New York investment bank that helps such clients as the California Public Employee Retirement System to critically examine complex financial transactions, such as Time Warner Inc.’s proposed rights offering.

The businesses have their roots in the student protest movement of the 1960s and, more recently, in a 1988 Labor Department ruling that requires pension funds to vote their share holdings with “care, skill, prudence and diligence.” Gone are the days when institutional shareholders blindly voted with management or failed to cast ballots.

“There is a growing realization that failing to cast a proxy is like failing to cash a dividend check,” said Nell Minow, president of Institutional Shareholder Services, a Washington-based proxy advisory and consulting firm. Minow also is the co-author of a new book entitled “Power and Accountability.”

But to vote intelligently, pension funds must be informed. And, as everything from executive compensation plans to corporate financing schemes become more and more complex, fund managers are turning to outsiders for information and analysis.

“What we are selling, basically, are quick and dirty answers that will allow a shareholder to vote intelligently,” said Eric Aiken, president of the Proxy Monitor Inc. in New York. The Proxy Monitor charges between $1,875 and $7,500 a year to help institutions puzzle through “what are laughingly referred to as disclosure documents,” Aiken said.

Clients say the new firms provide a valuable service.

“The ability to vote stock we hold is an asset,” said Kayla Gillan, assistant general counsel of CalPERS, the nation’s largest public-employee pension fund and a client of many of these services. “We have to take the same kind of diligence in voting our assets as we do in buying or selling them.”

The new activism among institutional shareholders is a direct result of a new owners’ mentality among investors. “If you stop thinking of yourself as a speculator or a stock investor and start thinking of yourself as an owner, your perspective on your investment changes,” said David Eisner, senior vice president of Providence. Like the firm’s three other principals, he is an alumnus of Los Angeles-based Jefferies & Co.’s mergers and acquisitions department.

“Historically, the task of enforcing management accountability was left to the raiders,” Eisner said. But, with takeovers on the wane, “shareholders have to look to less traditional means to enforce management accountability.”

One way is to launch proxy fights and insurgent candidacies for corporate boards of directors. Critics contend that most boards are not responsive to shareholder interests and do not provide independent oversight.

“The fact is, boards of directors are a lie and everybody knows they are a lie. But they are a convenient lie,” said Robert A. G. Monks, the founder of Institutional Shareholder Services who recently lost his bid for membership on Sears, Roebuck & Co.’s board after the giant retailer shrank the size of the board.

Monks left ISS in September and founded a new firm, Institutional Shareholder Partners, to pursue a more activist agenda, but he remains the intellectual father of the new industry. Monks started ISS in 1985, fresh out of the Labor Department, to alleviate what he calls “the collective action problem” that confronted institutional shareholders who wanted to affect corporate change.

He realized that individually even the biggest pension funds had little power over corporate managements. Collectively, however, institutional investors, who hold more than 50% of the stock of most big companies, had the power to elect boards and hold managements truly accountable for corporate performance.

“The first thing I wanted to do was to create a system of information, to give shareholders and managements alike a sense of shareholders’ collective presence,” said Monks, the other co-author of “Power and Accountability.”

“More and more, our clients are realizing that their main lever to improve performance is through the board,” said Howard Sherman, ISS senior vice president. And, he said, boards are increasingly getting the message. “Sure, there are some old geezers who are going to stonewall until they leave the board. But most directors want to do the right thing.”

Sherman points to USX Corp.’s recent restructuring that allowed shares in its steel business to trade separately from its oil and gas business. “There’s an example of an enlightened board of directors paying attention to a decent idea” put forward by shareholder Carl Ichahn, Sherman said.

The new firms have also led more and more companies to create so-called shareholder advisory committees, which let major shareholders talk directly with board members instead of through managements.

The new emphasis on corporate governance represents a new wave in shareholder activism. The first firm in the shareholder advisory business, the nonprofit Investor Responsibility Research Center, had its genesis in social issues. The firm was founded in 1972.

“The precipitating factor was rising interest in the role of U. S. businesses in South Africa,” said Margaret Carroll, executive director.

Funded by the Ford, Carnegie and Rockefeller Foundations, IRRC was the brainchild of former Harvard University President Derek Bok, who had dispatched a top university official to investigate the South Africa question after black students sat in at his office.

“He decided that Harvard, on its own, could not do this kind of intensive research every time one of these issues came up--and it was clear that more and more of them would come up,” Carroll said. Yale, Princeton, Oberlin, Stanford and Boston University immediately signed up.

Unlike the other shareholder advisory firms, IRRC restricts its output to analyses and never makes recommendations. “That is our uniqueness. That is what sets us apart and makes us valuable to a variety of institutions,” Carroll said.

From South Africa, IRRC has branched out into other issues such as Northern Ireland, the environment and corporate governance, and next year intends to launch a new global advisory service.