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Big Shareholders, Do Your Homework



Shareholder activism, born long ago out of concern over such issues as corporate social accountability, is taking a new twist. In recent years, shareholders started using proxy resolutions to protest management-entrenchment devices and to improve corporate governance, particularly boardroom practices. Now, shareholder activism is coming to grips with deeper corporate issues. The pacesetting California Public Employees' Retirement System is targeting poor performers and broadening its range of concerns. Although still intent on making boards more effective, Calpers is sounding off--rightly--about pay policy and corporate strategy (BW--Mar. 30). Close behind it are a few other public pension funds. New York State's fund, for instance, wants the Securities & Exchange Commission to permit big shareholders to critique corporate performance in proxy statements. Many chief executives aren't ready for this new age.

But neither are many institutional investors, who want to see the companies in their portfolios perform better. It's easy to petition a company to place only independent directors on its board's compensation committee. It's a lot more difficult to suggest that a company revamp its compensation policies or reconsider a failing diversification--ideas that require a sophisticated understanding of incentives and strategy. Yet many pension funds have tiny investment staffs, unversed in the ways of corporations. They may be sufficient to make investment decisions, but little more.

Activist shareholders want their voices to be heard. Many are too big merely to sell out their investment in companies that aren't performing. But before they follow Calpers, they must educate themselves. Like Calpers, they must buy or hire the expertise they don't have. Not doing enough preparation is one sure way to set back the progress of activism.

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