"Shareholder democracy" long has been derided as an oxymoron, like "military intelligence" or "jumbo shrimp." Yes, corporate managements bow endlessly to the mandate that they act exclusively in the shareholders' interest, but in real life they treat the poor sap with a few hundred shares as hardly more important than the night janitor.
So it's proper to ask why Big Business has been aiming its heavy artillery at a small clutch of shareholders who have the temerity to try to obtain for their fellows the right to vote at annual meetings on issues that might affect the value of their stock. Issues such as the structure of their companies' boards of directors, oversight of their chief executives' actions, the right to call special meetings — of shareholders — and so on.
The shareholders include John Chevedden, 68, a former employee of Honeywell and Hughes Aircraft who lives modestly in Redondo Beach and submits about 20 or 30 shareholder resolutions for annual meetings per year; and James McRitchie, 66, a Sacramento-area small investor who sometimes teams up with Chevedden.
In recent years, major corporations have started to file lawsuits, with limited success, to knock their resolutions off the agendas of their annual meetings. Recently the campaign seems to have stepped up. The conservative Manhattan Institute this year issued a lengthy report placing Chevedden, McRitchie and New York-based investor William Steiner among the leading "corporate gadflies" engaged in shareholder activism — calculating that the three are responsible for 70% of all shareholder proposals this year, and questioning their motives and success.
(The Manhattan Institute's board of trustees comprises a pretty fair cross section of hedge fund and corporate aristocracy, starting with its chairman, the hedge fund executive Paul Singer.)
The institute's report became the basis of an essay critical of the three last week in the New York Times by Steven Davidoff Solomon, a former corporate attorney now teaching law at UC Berkeley. His theme: "Corporate America is being held hostage by three people you have probably never heard of."
This triumvirate is accused, implausibly, of holding multibillion-dollar corporations "hostage," causing big companies to be "irreparably harmed" (as EMC Corp. complained in a lawsuit against Chevedden and McRitchie this year), and acting out of "personal pique" (the Manhattan Institute). So it's only proper to place in perspective what they actually are doing and what they've achieved.
"This is how companies are held accountable," Chevedden told me.
Shareholder activism began with Lewis and John Gilbert, wealthy siblings who started agitating for a voice for the individual investor in the 1930s and kept at it for more than six decades. (Lewis died in 1993 at age 86, John in 2002 at 88.) Their 1946 battle forced Transamerica Corp. to move its annual meeting from Delaware to California (where most of its business was located) and allowed shareholders to elect the company's independent auditors. The fight led to the Securities and Exchange Commission's codifying the rules for placing shareholder resolutions on the corporate proxy statement, which in effect is the agenda for the annual meeting.
Like Chevedden, McRitchie and Steiner, the Gilberts were responsible in their day for a sizable proportion of all shareholder proposals — 65% of those filed in 1955. Like their present-day heirs, the brothers focused on issues of corporate governance, such as the election of auditors, executive compensation and the elimination of staggered terms for board members, which helped entrench managements.
Of course, it's not unusual in any democracy for the vanguard to consist of a small group acting in the larger interest. And the SEC itself forbids shareholder proposals to deal with ordinary business decisions. "They can't say, 'You're making too many blue widgets and you should make more red ones,'" observes Nell Minow, an expert on corporate governance and a veteran investor-rights advocate.
As a result, shareholder proposals primarily deal with corporate governance issues such as who oversees the chief executive and how, executive compensation, and the rights of shareholders to be heard. Almost all such shareholder proposals are advisory only, meaning that managements don't have to comply even with a strong majority vote.
Shareholders can place their proposals on the corporate proxy if they've owned at least $2,000 in stock or 1% of a company's shares for at least a year, and the proposals' topics fall within the SEC guidelines.
It has never been easy to gain a majority vote in favor of a shareholder proposal — managements typically oppose them, and institutional investors, who make up the largest body of shareholders of the typical large public company, have customarily voted with management. But concerted efforts by Chevedden and other activists have changed corporate practice in numerous ways. Steiner, for example, waged a long campaign against retirement plans for corporate directors, who are supposed to be part-time advisors and not employees. "Bill Steiner's singlehandedly responsible for getting rid of those," Minow says.
The Manhattan Institute sniffs that support for proposals from Chevedden, McRitchie and Steiner has waned in recent years — from winning majority support for an average of about 15% to 30% of their proposals over the years to only 1% to 3% this year.
Its study also acknowledges that one reason for the waning support is that many larger companies have adopted "some of the ideas that gadflies and shareholder-proposal activists have espoused, including declassifying boards of directors, eliminating super-majority voting provisions in corporate bylaws and requiring that directors be elected by a majority of voting shareholders."
Sounds like a victory for the gadflies.
That hasn't stopped many corporations from waging a war of intimidation on them. Business interests have tried to smear the gadflies as people out to make a profit — though the SEC rules state that proposals must aim at changes that will benefit all investors equally. They've suggested that Chevedden is acting out of revenge for losing his job at Hughes in the 1990s, noting that he introduced his first proposal at General Motors, which owned Hughes. But that was two decades ago, in 1994.
Shareholder proposals filed by Chevedden have been the subject of at least seven federal lawsuits by their target corporations in the last four years. Typically, the companies are seeking the court's permission to delete the proposals from the proxy, on grounds that Chevedden doesn't own enough shares or that the proposals don't meet SEC standards.
Several cases produced technical victories for the companies, but the tide may have turned. Earlier this year, federal courts in Massachusetts and New York rejected requests by EMC and the advertising company Omnicom, respectively, to rule Chevedden's proposals out of order prior to their annual meetings.
Corporations argue that the shareholders are forcing them to spend millions to fight their proposals in court; UC Berkeley's Solomon cites an estimate of $90 million a year. But that claim deserves a horselaugh. No one is forcing companies to hire white-shoe law firms to run to the SEC or the courts for permission to strike a shareholder proposal — they spend that money on their own initiative.
"The very people who are rhapsodizing about the purity of the free market are the first ones to squeal about a free-market response," scoffs Minow. If managements don't want to confront shareholder proposals, she says, "they should go private."
Solomon acknowledges that the "gadflies" have inspired positive policy changes at some companies. But he argues that their filing proposals repeatedly despite not garnering majority approval interferes with corporate operations. "Companies are not designed to be democracies," he says. "They're designed to provide profits and economic value."
Yet it sometimes takes years for a shareholder proposal to move into the mainstream and acquire majority support. In any case, SEC rules say that corporations are free to block those that fail to attain a threshold level of approval — 10% of the vote if it has been submitted three times over a period of five years, for example.
It's more likely that managements fight shareholder proposals because executives, notwithstanding their pledge to be working exclusively in the shareholders' interests, don't want to be bugged by shareholders in the flesh. As activist McRitchie told me, "I don't hear a big cry from investors to stop our work."