Shareholder Activists Move toward Diplomacy: SEC Rules Changes Shift Dynamics of Corporate Governance

Article excerpt

The growing willingness of activists to challenge management is taking new forms. Proactive investor relations can help reduce and resolve conflicts.

Tracking shareholder activism is a lot like watching a lava lamp. New forms emerge, then slowly change as they make their ascent. The activist movement, however, is neither completely amorphous or mysterious.

Today's shareholders are more willing to challenge management on issues pertaining to corporate structure and strategy. The challenges can be publicly confrontational or quietly diplomatic. Take these scenes from the 1990s:

* A dissident shareholder takes aim at Sears with a full-page Wall Street Journal ad proclaiming directors "Non-Performing Assets" and urging them to reconsider five non-management proxy proposals. Later, shareholders reject the proposals, but by margins that a breathy USA Today headline claims signal the "most startling power shift in history."

* In a proxy fight, six dissident shareholders wrest control of XTRA Corp., winning 72% of the vote. They eliminate golden parachutes, expensive perks and a poison pill, reduce debt and cut costs. By April 1993, the stock had tripled in price, one month after a 2-for-1 split.

* A dissident Lockheed shareholder teams up with several leading institutional holders to press for reforms. In response, management consults with the institutions on four new directors and scraps its plans to diversify.

Welcome to the post-takeover age, or what Harvard corporate governance expert John Pound calls the era of debate, not debt. "In the 1990s, politics will replace takeovers as the defining tool in corporate governance challenges, and a marketplace of ideas will replace the frenzied activity that dominated the financial marketplace in the 1980s," he wrote in Harvard Business Review's March-April 1992 issue.

Others see less dramatic change. "It was only a matter of time before activists switched from the more social aspects of business to the more pragmatic aspects of corporate governance and performance," said Gabriel Werba, Fellow, PRSA, president of Werba and Associates Inc. of Detroit.

Greater investor interest in corporate issues, however, doesn't necessarily mean more conflict, according to Peter Harkens, senior vice president of D.F. King and Co., a New York-based investor relations and proxy solicitation firm. "Institutional investors have purchased controlling equity interest in Corporate America and have invested trillions in the future of this country. They want to see the system work, and so do the overwhelming majority of corporate managers and directors," he said. "In some ways, people are overreacting to the significance of what has occurred," Harkens added. "They're missing things of greater significance that are occurring and are resulting in a stronger partnership between issuers and investors."

The blame for any widespread misreading of shareholder activism may lie with the activists themselves. Their efforts have focused almost exclusively on large, visible companies, especially those with problems. The resulting media attention heightens awareness of their efforts, but it also exaggerates the extent to which confrontation is being used to achieve change. The fact that activists virtually ignore small and medium-sized companies was noted in May by the Wall Street Journal: "To hear some people tell it, corporate chieftains are on the run. ... The reality, however, is quite different."

Public sparring, in fact, may generate negative publicity for companies, but it leaves most shareholders cold. Anti-management resolutions rarely pass. From January through May of this year, the Investor Responsibility Research Center in Washington, DC, tracked 106 proxy proposals on executive pay, double the number proposed in 1992. The most successful of these resolutions garnered only 24.1% of the vote. Furthermore, these compensation proposals were an aberration. …