Cutting Loose From Shareholder Activists

A quick glance at the 1991 proxy season might prompt you to think peace has broken out between corporate management and activist shareholders. Sure, there were a few headline-grabbing fights--notably the attempt by dissident Robert A. G. Monks to win a board seat at Sears, Roebuck & Co. But even while Monks was losing, the number of proxy contests for board seats was declining. So were victories by dissidents. And this year, many executives who faced pesky shareholder proposals decided instead to bargain. Of the 153 corporate governance proposals submitted by institutions, only 101 came to a vote, according to Georgeson & Co., the proxy solicitors. Companies such as Avon, Xerox, and W. R. Grace volunteered to change their ways.

No question, that's progress. Says James S. Martin, executive vice-president of the College Retirement Equities Fund, which each year sponsors 10 or so resolutions: "There's a growing comprehension on management's side that we have real needs and that what we want is accountability."

PARACHUTES. But 1991 was not, by any means, a leap forward for shareholder activism. In fact, a closer look at recent developments reveals certain trends that may weaken the activist movement.

Those negotiated agreements, for one thing, are not all they're cracked up to be. In most cases, the companies agreed merely to adopt confidential voting of proxies. Secret balloting will curb management's ability to watch the votes as they come in and ask shareholders to reconsider. But giving in on this issue does little to improve management accountability. Worse, in many cases shareholders agreed to withdraw resolutions on other issues, such as blocking lucrative golden parachutes for managers, to win confidential voting. In the few cases--such as Avon Products Inc.--where management negotiated the creation of a shareholder advisory committee, it's unclear just what the panel will do.

Troubles at the $63 billion California Public Employees' Retirement System are also cause for concern. Public pension funds are the most vocal shareholder activists, and CalPERS Chief Executive Dale M. Hanson is the leader of the movement. As part of a state budget fight, Hanson is under pressure from Republican Governor Pete Wilson to rein in his activities (BW--July 1). "What's happening in California shows that out-front activism among the public pension funds is limited by politicians," says Lilli A. Gordon of Gordon Group Inc., consultants. Hanson's difficulties will likely mute the activism of his peers, she says.

Wilson's attempts to gain control of CalPERS' board--throwing out representatives of the fund's beneficiaries in favor of political appointees--bodes ill, too. "If a fund can be sidetracked by politics, the whole reason for shareholder activism goes out the window," says Gregg A. Jarrell, a former chief economist of the Securities & Exchange Commission now at the University of Rochester's business school.

Jarrell sees an even more damaging constraint on activism elsewhere: Because Delaware courts and many state legislatures have virtually removed the threat of hostile tender offers, the stick hanging over management no longer works. Mighty American Telephone & Telegraph Co., for example, needed five months to win NCR Corp., and whether NCR shareholders came out ahead for the wait is debatable. "Without an effective avenue for takeover entrepreneurs, the institutions can't be effective," Jarrell argues. "Without the ability to go over management's head with a tender offer, the system doesn't work."

'FREE RIDER.' The system does allow proxy contests to place directors on a board or to gain control of it. This year, dissidents won minority representation at Cleveland-Cliffs Inc. and Baltimore Bancorp. But proxy fights have problems of their own. They are riskier, more time-consuming, and more costly than tender offers. They offer no chance for an immediate payoff for the dissenter. Finally, they create the problem of the "free rider." A dissenter with, say, a 10% stake in the company foots the entire bill for the process but receives just 10% of any benefits.

To be effective, shareholder activism need not be confrontational. Next year will likely see investors continuing to focus on resolutions urging more independent directors and confidential voting. And they will try to make sure executive compensation is related to performance and monitored closely by outside directors. Such moves, however, can only go so far. Before activism regains its punch, shareholders may have to zero in on Delaware and the state legislatures--perhaps by pressuring corporations to give up their antitakeover protection voluntarily.

Before it's here, it's on the Bloomberg Terminal.