Boards Heeding Investor Activists
Inspired by their success at Walt Disney Co., activist shareholders have jolted corporate America with a flurry of challenges led by increasingly aggressive institutional investors.
In the most recent uprising, a group of large public pension funds in effect declared war on Safeway Inc., announcing their goal of overhauling the board, getting rid of the chief executive and setting the company on a drastically new course.
The Safeway revolt came just days after Marsh & McLennan Cos. bowed to demands from a group of shareholders that it appoint a new, independent director to help watch over its scandal-ridden Putnam mutual funds subsidiary.
Now the emerging season of annual meetings is expected to bring an unusual number of concessions by management to investors on matters ranging from board independence and election policies to executive pay and splitting up the roles of chairman and chief executive.
Lynn E. Turner, former chief accountant at the Securities and Exchange Commission, compared the wave of activism with a “storm front” that is gusting up against a host of corporate boards.
“And if boards and executives are not responsive to investors when their performance has been lacking, I suspect we’re going to see some more lightning strikes,” said Turner, managing director at proxy advisory firm Glass, Lewis & Co.
The prospect is leading to about-faces in boardrooms, where directors have traditionally been able to ignore shareholder proposals with little risk. It has also prompted new debate about the agenda of large institutional investors, notably the public employee and union pension funds that are leading the attack on entrenched corporate interests.
Safeway provides a case in point. Public pension funds from California, New York, Illinois and Connecticut said they wanted to overhaul management because of the company’s poor financial performance, which has hurt their funds.
“We are capitalists,” said New York State Comptroller Alan Hevesi. “We are investors. We are measured as pension fund managers by how well we do in the market.”
Safeway officials have contended that the funds targeted their company because of its hard-line labor policies, as seen during the recent strike by grocery workers in Central and Southern California.
Certainly, debates over a fund’s motivation may become increasingly common as funds become more assertive in their dealings with corporations.
“I don’t want my board of directors worrying about whether they’re going to have problems with the union pension fund if they drive a hard bargain at the bargaining table,” said Stephen M. Bainbridge, a professor at the UCLA School of Law.
Joseph A. Grundfest, a professor at Stanford and a former SEC commissioner, called it “fair and appropriate” to consider the pressures and motivations that influence the giant pension funds in their dealings with companies -- just as the public has long scrutinized the conflicts of corporate executives.
“What’s good for the goose is good for the gander,” he said. “There are potential conflicts on both sides of this fence.”
The struggle is heating up against a regulatory background that looks increasingly friendly to the challengers.
Under an SEC proposal, dissidents who have large shares of stock and broad support from other investors could for the first time use a firm’s official election materials to push independent candidates for the board. The plan has emboldened shareholders, and recent events dramatize that it could be a significant new weapon.
Extraordinarily, protest votes at Disney and, less publicized, at Vail Resorts Inc. in Colorado appear to have been large enough to have triggered new election campaigns under the SEC’s proposal, which sets a threshold at 35%.
“It’s all part of the same thing,” said Richard Ferlauto, director of pension investment policy for the American Federation of State, County and Municipal Employees, or AFSCME. “Shareholders are asserting their power in a way that is historically unprecedented. They’re demanding serious board changes, and they’re organizing themselves so that they really have an effect.”
Not that everyone is applauding. Business interests and other critics contend that dissident shareholders can create problems by barging into domains of decision-making that would be better left to professional management.
“You don’t run General Motors like a New England town meeting,” Bainbridge said. “You can’t have millions of shareholders weighing in on every decision that the board makes.”
Corporate watchers took careful note March 18 when Marsh & McLennan announced it would nominate an independent watchdog to its board to settle a dispute with a group of funds. The company endorsed Zachary W. Carter, a former federal attorney, to serve on its board. Pension funds, including AFSCME and the California Public Employees’ Retirement System, dropped their plans to mount a challenge to the board.
“This, in its own way, is more interesting than the Disney vote,” Nell Minow, editor of the Corporate Library, a governance website, said of the outcome of the controversy at Marsh & McLennan.
“They got a director. That is a major, major development.”
In less dramatic but equally telling cases, companies have been reversing long-held policies in response to shareholders whom they previously ignored.
For six years, shareholders at Lucent Technologies Inc. asked the company to have all board members stand for reelection at the same time, a change the investors viewed as helpful for board accountability. The proposal won majority support in 2001, 2002 and 2003.
The board rejected the proposal each time, contending that the staggered terms were good for stability.
Until this year. In February, Lucent executives finally embraced the plan. That shareholders “demonstrated belief and commitment to this proposal was something the board took into consideration,” said Bill Price, a spokesman for the Murray Hill, N.J.-based communications firm.
“The basic feeling was the time was right to move ahead with that change.”