A New Era for Investor Activism?

Michael Eisner and Martha Stewart may have assured that more investors this spring will do something that usually bores them: actually read their companies’ proxy statements -- and then vote their shares with interest rather than with resignation, or not at all.

The dramatic finish to Walt Disney Co.’s annual shareholder meeting last week, which saw Chief Executive Eisner rebuffed by the holders of 43% of the shares voted in his reelection bid as a director, is raising hopes among corporate governance reformers that they’re nearing a critical mass of sorts.

Historically, persuading even 5% of shareholders to reject a sitting CEO has been more than most investor activists could hope. To get 43% to snub management suggests that investors up and down the size scale, from individuals to private money managers to big mutual funds, agreed that a message badly needed to be sent.

As for Martha Stewart, her conviction Friday on all counts in the federal obstruction of justice and conspiracy trial involving her trading of ImClone Systems Inc. shares was a stunning victory for the government in its prosecution of white-collar crime -- and a reminder of the seemingly boundless executive greed of the 1990s boom years and their aftermath.

The Disney and Stewart cases are energizing those who believe that shareholders, as the suppliers of capital to the capitalist system, must be a louder voice for corporate change on issues including executive compensation, transparent accounting, board independence and basic honesty in business.

“I think this is the opening curtain for a new age of shareholder activism,” said Patrick McGurn, senior vice president of Institutional Shareholder Services, which advises big investors on proxy issues.

It would be in McGurn’s interest if that’s so, of course. There’s always a tendency at a moment like this to overstate the case. If the stock market continues its winning ways, many investors may well opt for the easier route of giving management whatever it wants rather than joining a campaign for tougher oversight.

Still, the push for greater corporate accountability has been gaining steam for the last two years. The collapse of fraud-ridden Enron Corp. led to the federal Sarbanes-Oxley Act in 2002, which boosted financial disclosure requirements and penalties for executive wrongdoing.

That was followed last year by rule changes at the New York Stock Exchange and the Nasdaq Stock Market requiring that listed companies show that a majority of their directors are independent of management -- an attempt to lessen the odds that any CEO could wield imperial power over his board and his company.

And this year under a Securities and Exchange Commission order, mutual funds must begin disclosing how they cast their proxy votes for individual companies. The fund industry had long fought that idea, arguing in part that most shareholders didn’t care. Now, the votes will become part of the public record -- which will put more pressure on the funds to support challenges to management on hot-button issues, many investor activists say.

With the funds, “I think we’ll be seeing votes we should have seen before,” said Damon Silvers, associate general counsel at the AFL-CIO, which has been a leader in sponsoring shareholder resolutions, such as to limit executive pay.

The total number of resolutions appearing on the proxy ballots of major companies soared to about 1,100 last year from about 800 in 2002, according to the Investor Responsibility Research Center in Washington. This year, the group said it already had counted more than 1,000 -- and annual meeting season hasn’t yet begun in earnest.

For the average investor, all of this ought to raise two main questions: First, can shareholder activism produce meaningful results -- in other words, is it worth the effort? And second, is there a danger that activism could get carried away and hamper honest company managers who are trying to produce strong returns for their investors?

The heavy shareholder vote against Disney’s Eisner might well disappoint as many investors as it galvanizes: Despite the rebuke he received, the company’s board the same day expressed unanimous support for him, though it also stripped him of the chairman’s post.

In the case of shareholder resolutions on proxy ballots, virtually all of them are nonbinding. Directors are free to ignore them, and many have in the past.

But a landmark proposal under consideration at the SEC could change that. The commission is considering whether to make it far easier for dissident shareholders to nominate their own director candidates for corporate boards. One possible “trigger” for allowing such nominations could be whether a company has refused to act on investor resolutions that have received a majority vote.

Last year, 166 shareholder proposals garnered majority votes, up from 98 in 2002, Investor Responsibility Research Center reports show.

The center’s data also indicate that more companies are agreeing to do what the majority of shareholders ask. But that’s harder to measure, for a number of reasons, many activists say.

The California Public Employees’ Retirement System, perhaps the best-known agitator for better corporate governance over the last two decades, said some of its proposed shareholder resolutions never make it to the proxy ballot. Instead, corporate managements often enter negotiations with CalPERS to work out a deal that satisfies both sides, said Christy Wood, senior investment officer for global equities at CalPERS in Sacramento.

“Companies often work very hard with us to get resolutions withdrawn,” Wood said.

In any case, many governance experts say the days are long past when managements and directors could treat activists like mere annoyances.

In the post-Enron world, the corporate view has to be that “we all live in glass houses now,” said Joel Seligman, dean of the Washington University law school in St. Louis.

Could shareholder activists gain too much power -- and begin to interfere with business decisions that should be left to management?

There’s a principal buffer to keep that from happening: SEC rules permit companies to reject proxy resolutions that arguably would intrude on a firm’s “ordinary business” operations.

Leading activists say they have been, and will continue to be, focused on the big issues that clearly involve more than ordinary business -- for example, director independence, and how stock option grants are awarded to senior executives.

CalPERS’ Wood said activists are a long way from having the luxury of nit-picking corporate decision-making.

On the basic issue of executive compensation, she said, “There are many other companies where we think there is a significant misalignment of interests between compensation and shareholders’ returns.

“There’s a lot of low-hanging fruit here.”

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