Commentary: Poison Pills: Let Shareholders Decide

A decade ago, corporate chieftains often cowered behind arcane legal defenses called poison pills to keep raiders at bay. Now, in the midst of the annual-meeting season, many institutional investors have declared that it's time to dump those nasty little concoctions that saved the hides of management but sometimes cost shareholders dearly.

Why now? Because many of these poison pills, which can make a takeover prohibitively expensive, if not impossible, are coming up for renewal. Unfortunately, however, boards aren't required to consult with shareholders when it comes to renewing them. That isn't stopping shareholder activists from pushing for public debate and repeal of such measures. The poison-pill controversy is playing out at as many as 40 major companies this year alone. "Companies adopted everything but the kitchen sink to deter a takeover," says Peter C. Clapman, chief counsel for investments at Teachers Insurance & Annuity Association-College Retirement Equities Fund (TIAA-CREF). "They hoped that shareholders didn't notice. We noticed."

Such challenges are long overdue. Academic studies are filled with conflicting evidence on whether pills hurt or help a company's stock price. But certainly, shareholders should have the right to vote on whether a pill--which could affect the stock's value--should be renewed and under what circumstances.

True, it's not always easy to get resolutions past apathetic shareholders. Although the State of Wisconsin Investment Board garnered a 52% majority at Union Carbide Corp. to enact a provision requiring Union Carbide to seek investor approval before adopting a new poison pill, a similar effort failed at Applied Materials Inc. Shareholder votes on the issue are scheduled at J.C. Penney, Quaker Oats, Time Warner, and Northrop Grumman.

What's more, boards won't always play ball even when shareholders win a say-so. After successful efforts to get seven companies to revoke their pills this year, TIAA-CREF, the world's largest pension fund, is running into trouble at Lubrizol Corp. There TIAA-CREF is trying to dump a so-called dead-hand poison pill that can only be eliminated by incumbent directors. Even though the fund's initiative advising the board to scrap its pill garnered 68% of the proxy votes, at least three Lubrizol directors suggested to BUSINESS WEEK that they may vote against repeal.

It seems that some of Lubrizol's board members need to be reminded that TIAA-CREF's victory reflects something far more fundamental than whether a company should retain a rather esoteric defense mechanism. Despite the possible setback at Lubrizol, TIAA-CREF plans to target at least 30 more corporations.

More profoundly, these disputes underline the right of the owners of a public company to assert their views on core issues that directly affect their interests. Perhaps the ultimate irony is that it was exactly this kind of self-serving management that helped fuel many of the raiders that these poison pills were designed to ward off in the first place.