Shareholder Activism Can Be Profitable Trend
If you are a shareholder of a publicly held corporation--and the bulk of Americans are, either directly or indirectly through a retirement plan--it’s still not too late to join one of the most sweeping investor trends in decades: shareholder activism. And such a move could be also good for your pocketbook.
As millions of Americans receive proxies for the 1993 spring and summer meeting season, more people than ever are expected to participate as activists. That’s largely because securities regulators changed the rules late last year to make it easier and less costly for shareholders to band together and complain to management--the simplest form of shareholder activism.
Until last October, communications between more than 10 shareholders required government review before mailing, says Nell Minow of LENS Inc., a Washington-based investment company. Now shareholders can communicate with one another without first sending their letters to the Securities and Exchange Commission.
That simple change has opened activism to the masses. That’s good for shareholders because communication between management and owners can only help company performance, Minow maintains.
“I think companies perform badly because (often) they have surrounded themselves with nodders,” she says. “You need somebody with a little bit of an outside perspective to come in and question your assumptions. That’s what this is all about--making sure the right questions get asked.”
What does activism mean to shareholders? Added profits, experts say.
Two recent surveys commissioned by the California Public Employees Retirement System, known as CalPERS, found that investors who capitalize on shareholder activism can expect to earn substantially better returns than what you would expect from a “passive equity investment.”
The added return ranges from 4.5% at companies where shareholder initiatives have been quietly and privately negotiated to about 15% at companies that have been overt targets of shareholder attention, according to the Gordon Group, a Massachusetts firm that conducted the most recent and most comprehensive study.
“Activism definitely has an impact,” says Richard H. Koppes, general counsel of CalPERS, a leader in the activist movement.
Consider Sears, Roebuck & Co. The retailer, a poor performer for several years, started battling with its shareholders in earnest in 1991, when some holders launched a proxy contest. The fighting continued through last year, when CalPERS announced that it would vote against directors and vote for several shareholder proposals that management opposed.
With shareholders ganging up against management, the company finally agreed to “deconglomerate,” jettison the chief executive of the company’s least successful operating division and make numerous other changes. Sears stock price has subsequently shot up by about $10 a share--about a 20% gain.
Of course, not all attempts have been equally successful.
The key to making money through activism is to pick your targets. And your best bet is a sorry performer where managers are out of touch, Minow says. That’s because a change in the company’s management or board of directors can have a dramatic impact on stock price. If the company simply becomes an average performer, its stock price is likely to soar just to catch up to the prices commanded by the company’s peer group.
So how can you participate in the activism trend?
* Vote and vote wisely. After receiving proxy voting cards, check the company’s performance by looking at the chart in the back of the proxy. It should show how well your company has performed relative to companies in general and relative to an index of its peers. (Only newly issued proxies have these charts. If your company’s fiscal year ended before Dec. 31, 1992, checking performance is not quite as simple.)
If the company has done well, vote for management proposals and management-sponsored directors. But if it has been performing poorly and paying executives too much, vote against all directors, or those on the compensation committee, Minow says.
* Avoid politically motivated shareholder motions. If you are trying to increase your stock value, concentrate on motions that promote better “corporate governance” such as secret balloting, plans that would rescind anti-takeover provisions or that would foster shareholder rights. Politically motivated proposals generally do nothing to boost share values.
* Sponsor a shareholder proposal. If you don’t like what’s happening at the company and believe that you have a good suggestion, consider getting it placed on the proxy for a shareholder vote. This can be a little complex, though. If you plan to make a motion, it’s wise to join the United Shareholders Assn. in Washington. Membership costs $50 annually, but they’ll take you by the hand and lead you through the process.
