Welcome Back Shareholder Clout

The bear market and corporate scandals of the past several years weren't all bad. If nothing else, shareholders woke up to the fact that the companies they own had slipped out of their control. Galvanized by disastrous returns, they're finally exerting power. And chief executives who once ran companies like personal fiefdoms are behaving more like the employees they are. The comeback of shareholder power is evident in everything from increased dividend payouts, to cutbacks in option grants to top bosses, to new government rules that increase shareholder clout. It's all long overdue.

Start with dividends. Not so long ago, CEOs whose companies paid dividends were perceived as timid and unimaginative. Now, even longtime holdout Microsoft Corp. has started paying one, however small. And other companies are looking to initiate or raise payouts. Sure, the recent cut in taxes on dividends is one reason for the change. But an equally important factor is the realization in boardrooms across America that CEOs don't always have a better use for shareholders' money -- i.e., profits -- than the shareholders themselves do.

The nascent trend toward rewarding employees with restricted stock instead of stock options is another victory for shareholders. Options have their place, especially in startup companies. But they are funny money whose value fluctuates dramatically in response to changes in the stock price. The option mania of the 1990s, combined with the bull market, transferred more wealth to top executives than shareholders ever intended. Whenever the next bull market comes, it's highly likely that the same kind of unintended wealth transfer will recur at companies that issue lots of options. In contrast, the value of restricted shares is far more stable -- and understandable. By switching to awards of restricted stock, Microsoft, Exxon Mobil (XOM ), and other companies are ensuring that their top executives and other employees will get a fair share of future stock appreciation, but not the lion's share.

As shareholders attempt to assert control, they're fortunate to have an ally in Washington. Under Chairman William H. Donaldson, the Securities & Exchange Commission has set a decidedly pro-shareholder agenda. In late June, the SEC approved a requirement that shareholders vote on equity compensation plans, including options. Now, at Donaldson's behest, the SEC's staff is drafting rules that would make it easier for outside shareholders to nominate directors in opposition to the board's own slate. The SEC's reforms, coupled with a newfound assertiveness by shareholders themselves, are righting an imbalance of power between corporate insiders and outsiders that has existed for too long.

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