Activist Investors Making Inroads

For four straight years, lumber giant Weyerhaeuser Co. has faced an annual shareholder vote on a proposal that all company directors be reelected yearly instead of serving staggered three-year terms.

The argument for annual reelection, according to investors who support the measure, is that it would improve the board’s accountability to shareholders. The company has consistently opposed the idea.

For the last two years, Weyerhaeuser investors appear to have spoken loud and clear: The proposal got 55.9% of the votes cast at the 2002 annual meeting. At this year’s meeting, held April 15, the ayes jumped to 63.8%.

Weyerhaeuser management’s response after the 2002 vote was to study the issue and then reject it. With the most recent vote, the board will “take it under advisement again,” said Bruce Amundson, director of financial relations for the Federal Way, Wash.-based company.

Weyerhaeuser illustrates both the ecstasy and the agony shared by activist investors during this annual-meeting season. As they seek to reform corporate behavior in the post-Enron Corp. era, activists finally are winning over many other shareholders who for years had loyally -- and blindly, some say -- backed management. By most accounts, the success rate of shareholder proposals on company proxy ballots this year has been extraordinary.

Yet in the world of proxy voting, winning a majority can bring self-satisfaction for dissident shareholders, but it’s no guarantee of genuine change. That’s because their resolutions almost invariably must be advisory, not binding, on a company’s board or its managers.

Even so, many activists -- especially labor union pension funds -- are crowing about their victories this spring. They point not only to the majority votes their resolutions are getting at annual meetings, but also to the growing list of companies that are voluntarily implementing suggested governance reforms on issues including executive pay, stock-option expensing, board structure and general accountability to investors.

It is, say many activists, a good start to a corporate behavior-modification campaign that they vow will have real legs.

Patrick McGurn, senior vice president of investor-rights group Institutional Shareholder Services in Rockville, Md., said he counts 71 majority votes for shareholder resolutions so far this proxy season, most of them against major firms. He expects the final tally to top 150, which would be “50% more than we’ve ever seen before,” he said.

“These are big numbers,” said Charles Elson, director of the Center for Corporate Governance at the University of Delaware. “They show that people are very angry, and mistrustful of management.”

In the aftermath of the corporate and Wall Street scandals of the last 18 months -- and three years of sinking stock prices -- perhaps it would only have been surprising if anti-management sentiment wasn’t evident in shareholder proxy votes. The desire for revenge can be a deep-seated human trait, after all.

At companies including Apple Computer Inc., Georgia-Pacific Corp. and US Bancorp, shareholders approved resolutions requesting that the firms begin to formally count employee stock options as an expense, instead of excluding those costs in determining net income.

At railroad company Union Pacific Corp., a measure requesting that the firm allow a shareholder review of executive severance-pay agreements passed with 56% of votes cast.

As at Weyerhaeuser, shareholders of clothing maker VF Corp. approved a resolution proposing that the company put directors up for election each year instead of every three years.

Some companies acceded to shareholders’ requests without a fight this year. A resolution from fund manager Domini Social Investments asking FedEx Corp. to adopt a policy of nondiscrimination with regard to sexual orientation was withdrawn after the firm agreed to amend its policy, Domini said.

In many cases, however, managements have remained intransigent even in the face of majority shareholder votes.

Apple Computer, for example, said that although “the board takes seriously the views expressed by its shareholders regarding expensing of stock options,” the firm won’t do so unless and until it is required to make that shift under accounting rule changes that would apply to all companies.

Because almost all shareholder resolutions are simply advisories, the best management response many activists can hope for is that a company will “consider” a proposal.

That’s what US Bancorp will do with the options-expensing vote, said spokesman Steve Dale in Minneapolis. Ditto for an options-expensing vote that got a majority at Pittsburgh-based PPG Industries Inc., a spokesman there said.

The new push to improve corporate governance is raising old questions about the relationship between investors and management, and the risk entailed when shareholders attempt to take certain management decisions into their own hands. It also is raising old questions about whether the things that activist shareholders want would boost stock returns in the long run or weigh them down.

Elson and others say the failures of Enron, Adelphia Communications Corp. and WorldCom Inc. show that where good governance is lacking, financial disaster may loom.

“Good governance creates a floor through which companies should not fall,” Elson said.

There still is a legitimate argument that just because shareholders want something doesn’t necessarily mean it’s the right thing for their company to do.

Weyerhaeuser, Lucent Technologies Inc. and other companies with staggered terms for directors have argued that such a structure ensures that corporate raiders couldn’t succeed too easily with hostile attempts to force out management and take over the firm at a cheap price.

“The company would be in a better position to seek the best possible outcome for shareowners,” Lucent said in its recent proxy argument supporting a staggered board setup.

A reasonable person could agree that Lucent has a point -- except that hostile takeover attempts are almost unheard-of these days.

Despite the collective investor outrage over corporate behavior in recent years, shareholders at some companies have continued to vote down activists’ resolutions during this proxy season. IBM Corp. holders, for example, said no to expensing stock options.

AOL Time Warner Inc.’s management and directors have come in for withering criticism over the last year for the stock’s steep decline and the company’s business struggles. Yet at the annual meeting Friday, shareholders still elected all 13 nominated directors, including former Chairman Steve Case, who has been widely vilified for his stewardship of the firm.

At the AFL-CIO in Washington, which has sponsored dozens of shareholder resolutions this year, Investments Director Bill Patterson expressed frustration with what he perceives as a “business as usual” attitude on the part of many big shareholders, especially mutual funds.

“This process is so glacial,” he said of trying to persuade other shareholders to pressure management on important issues.

Nonetheless, the proxy victories this spring have been galvanizing, Patterson said. The plan is to keep up the campaign even after the annual-meeting season ends, he said.

“It’s our job to go back to the boards and say, ‘Shareholders’ opinion is squarely for reform -- now what are you going to do?’ ”

The activists’ victories also have set the stage for what may be the most important governance battle to come, Patterson said: the effort to change the process by which company directors are nominated, to allow shareholders to put up their own candidates to compete with those of a firm’s chief executive.

The AFL-CIO last week submitted a petition to the Securities and Exchange Commission, outlining the union’s ideas for granting big investors “equal access” in the director-nominating process. The SEC plans a wide-ranging review on the subject.

The unions and other activists say they aren’t looking for a way to stack corporate boards. What they want, they say, is to be able to put up for election alternative -- and truly independent -- director candidates when a company’s existing board has clearly failed shareholders.

Patterson says he has no illusions about how tough a fight activists are facing on this issue.

“The ability to handpick their board is something CEOs are going to defend with the same intensity of the Red Army defending Stalingrad,” he said. “It’s where they live.”

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Shareholder proxy votes: A sampling

Here’s a look at how shareholders voted this annual-meeting season on some resolutions placed on proxy ballots by activist investors.

*--* Company Proposal Shareholder vote Delta Air Lines Expense stock options Passed: 62% in favor Georgia-Pacific Expense stock options Passed: 63.5% in favor Raytheon Allow shareholder Passed: 65.4% in favor review of certain executive severance packages Union Pacific Allow shareholder Passed: 56% in favor review of certain executive severance packages Analog Devices Expense stock options Failed: 61% opposed Bristol-Myers Squibb Split the offices of Failed: 61% opposed chairman and CEO Janus Capital Override management Failed: 77% opposed compensation plans Sprint Reject reelection of Failed: 62% opposed Ernst & Young as auditor

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Percentages are of total shares casting a vote.

Sources: AFL-CIO, company reports, Bloomberg News, Reuters

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Tom Petruno can be reached at tom.petruno@latimes.com.