Shareholders Have Chance to Push Through Change

Corporate annual meetings could be uncharacteristically exciting this year, as shareholders, bristling over high pay and poor corporate performance, exercise their muscle.

Stockholders are expected to force companies to hold more elections on more issues than ever before. These insurgent proposals--many of which will involve the once sacred area of executive pay--are likely to get greater support. And the shareholders’ questions are likely to be more sophisticated and to command more attention from managers, says Ralph Whitworth, president of the United Shareholders Assn. in Washington.

“This will be a watershed year for stockholders,” he says. “There is tremendous growth in shareholder activism.”

That activism has been growing for several years. In 1986, there were only 55 proposals related to shareholder rights, according to statistics compiled by the Investor Responsibility Research Center in Washington. These proposals won a scant 12% approval on average, Whitworth notes. But last year, there were almost 300 such proposals, and they took roughly 40% of the vote, he says.

Furthermore, “just a few years back anyone who asked a challenging question at an annual meeting was immediately dismissed as a gadfly,” Whitworth adds. “That is no longer the case.”

Most managers are paying more attention and responding more carefully than before. The main reason for the shift is that the so-called gadflies of yesteryear usually owned fewer than 1,000 shares--not enough to make a difference at most companies. But today many of the shareholders leveling questions are associated with gigantic pension funds that direct billions of dollars worth of investments.

Additionally, the recession, which has damaged corporate earnings and dividend payouts, has heated up shareholder concerns about corporate products, policies and pay. Only “Neanderthal” chief executives would ignore such legitimate concerns, Whitworth contends.

Many believe that executive compensation will be this year’s hottest issue. Stockholders are expected to demand that managers accept lower salaries for declining corporate performance.

This is the first year that stockholder proposals on executive compensation can be included in the proxy statements sent to shareholders.

Previously, the Securities and Exchange Commission, which regulates publicly held companies, barred votes on executive pay because it was considered part of the company’s day-to-day operations. But the SEC recently reversed itself and said shareholders can submit advisory proposals on compensation. Managers still aren’t bound to take shareholders’ advice on this issue, but now they’re required at least to listen.

Industry experts suggest that shareholders take advantage of these increased powers and the growing power of shareholder activists by being more careful about how they vote.

Traditionally, shareholders have tended to vote with management or “vote with their feet” by selling their stock. But some experts now urge stockholders to reconsider doing either. Instead, they should read proxy statements carefully and vote with management only when it makes sense.

As for executive pay, several big firms plan to submit new compensation proposals to shareholders this year, and at least one compensation expert suggests that shareholders reject plans that include “restricted stock,” discounted stock options and other elements not related to performance.

An individual shareholder’s vote may not keep plans from passing, adds Gary C. Hourihan, president of Strategic Compensation Associates. But when more than a few shareholders vote “no,” he says, it sends a “powerful message” to management.

Shareholders who are unhappy with overall performance can also vote against directors. Whitworth suggests that shareholders include a letter with any “no” vote to explain exactly why they’re displeased. That should at least put a board on notice that they may be ousted if performance doesn’t improve.

Finally, anyone anxious to press a specific issue might consider sponsoring a shareholder proposal. To do so, the shareholder must own at least $1,000 worth of stock for over a year, Whitworth says. Corporations also require advance notice when the stockholder wants the proposal included in the proxy statement and voted on at the annual meeting.

Anyone who needs help putting together such proposals can contact the United Shareholders Assn. at 1667 K St. N.W., Suite 770, Washington, D.C. 20006.