Navigating the Brave New World of Shareholder Activism
March 30 2011 by James R. Copland
Dealing with shareholder activism is increasingly important for today’s public-company executives. Even before passage last summer of the Dodd-Frank Wall Street Reform and Consumer Protection Act, shareholder-backed proxy proposals were gaining traction: according to data collected on the Manhattan Institute’s online corporate-governance database, ProxyMonitor.org, the percentage of such proposals being approved by a majority of shareholders more than doubled from 5.2 percent in 2008 to 10.8 percent in 2009.
Since passage of Dodd-Frank, shareholder activists have more ammunition with which to fight. Section 951 of Dodd-Frank mandates annual, biennial, or triennial shareholder “say on pay” votes on executive compensation (and early returns suggest that shareholders are opting for annual votes, unless there are special share-voting classifications that empower management). Section 971 of the new legislation could force companies to list shareholders’ nominees for director on proxy ballots, if Securities and Exchange regulations survive legal challenge.
To gain a better understanding of these issues, the Manhattan Institute this January launched a new public database, ProxyMonitor.org, which contains relevant information on all shareholder proposals submitted to Fortune 100 companies since 2008. Over the last two months, our analyses of the data—released to the public in a series of “findings”—have led to new insights about the role of organized labor in shareholder activism, about trends empowering shareholder activism outside the annual-meeting schedule, and about attempted changes to voting rules that could have a major impact on corporate governance.
Unions a Driving Force behind Shareholder Activism
The AFL-CIO and the American Federation of State, County and Municipal Employees (AFSCME) are two of the top five sponsors of shareholder proposals in the Proxy Monitor database, and many other labor pension funds also play a large role. While union funds obviously have a duty to oversee their investments and maximize returns for retirees, the large role played by labor unions in the proxy process has led to worries that rather than maximizing investment value, union activity is geared toward extracting labor concessions from management that may benefit union workers but be against the interests of non-union shareholders.
The data gathered from the Proxy Monitor database tend to buttress these concerns, since unions have played a very limited role in sponsoring proposals other than those peculiarly sensitive to management, i.e., those involving executive compensation or the separation of board chairman and chief-executive officer positions. Labor unions have sponsored 38 percent of all proposals related to executive compensation over the last three years, as well as 58 percent of all proposals seeking to mandate a non-executive board chairman. Since executives are inherently interested in their own pay, and since CEOs who also serve as board chairmen are unlikely to want to give up active management of the business or welcome in a new boss, there’s reason to fear that labor’s interest in pushing these proposals is linked to increasing negotiating leverage over management to extract more generous labor concessions.
Shareholder Activists Seek Year-Round Calendar
While public-company executives and their counsel and boards are generally acquainted with handling annual-meeting shareholder pressure, many of the most-successful recent proxy proposals have centered on allowing shareholders to act year-round. 73 proposals submitted to the shareholders of Fortune 100 companies over the last three years were geared toward enabling shareholder action outside of annual meetings. Fully 78 percent of proposals allowing shareholders to act by written consent outside of annual meetings were approved, in addition to 28 percent of proposals empowering shareholders to call special meetings.
Changes to Voting Rules Could Change the Landscape
Also relatively likely to pass in recent proxy seasons have been proposals altering shareholder voting rules. Some of these proposals, calling for “simple majority” voting, would enable a majority of shareholders to amend corporate bylaws and/or require that directors be elected by a majority rather than a plurality of all shareholder votes cast. These proposals have tended to be popular—70 percent passed over the last three years—and they may dramatically affect the director-election process if Dodd-Frank-based SEC rules permitting shareholders to nominate directors survive legal challenge and come into effect.
Other voting-rules proposals to watch are those calling for “cumulative voting,” i.e., empowering shareholders to aggregate all their director votes behind a single nominee. None of these proposals has yet passed for a Fortune 100 company, but a majority of such proposals have garnered at least 30 percent support, with a high of 44 percent. Should such proposals be approved, we can expect shareholder activists and organized labor to pool their votes to gain union- or other special-interest representatives on corporate boards.
How to Proceed
To navigate the brave new world of corporate governance, successful chief executives will need to be proactive rather than reactive in managing shareholder activism. It would behoove management to cultivate relations with proxy-advisory firms like Institutional Shareholder Services, which is a powerful player, for better or worse, in driving institutional-investor voting. Consistent, direct communications with institutional investors themselves, conveying management’s positions about corporate-governance issues, is also advisable.
To the extent that organized labor or other special-interest pressure groups are attempting to leverage the corporate-governance process to extract concessions, effective managers will have to determine, on a case-by-case basis, whether accommodation or fighting is more in the interests of shareholders. Managers should not be afraid to shine light on activists’ tactics, particularly when led by public-employee funds led by elected officials or in cases in which funds’ objectives potentially conflict with their fiduciary duties to their investors.
Finally, executives should stay abreast of trends in this area and watch how shareholder activism is playing out with other companies, particularly competitors, peers, and those in the same industrial sector. The Manhattan Institute’s ProxyMonitor.org database makes comparing trends across companies and over time easy, and should empower executives and their advisors to have better information with which to handle shareholder pressures.