Earlier this year, activist investor William A. Ackman waged a $10 million fight to get five nominees, including himself, elected to the board of discount retailer Target (TGT). He lost. Ackman, founder of the $4.5 billion hedge fund Pershing Square Capital Management, attributes his defeat in part to the fact that most investors could turn in only one of two ballots: the slate of directors from the board's nominating committee or the one put together by him.
Now, a triple threat of pending and potential legal changes could give Ackman and other shareholders an easier time shaking up corporate boards. As of Aug. 1 stockholders of Delaware corporations—which account for more than 50% of all public companies in the U.S.—will be able to adopt bylaws that let them suggest their own directors on a company proxy statement. Meanwhile, the Securities & Exchange Commission is weighing a rule change that would force large companies to let investors with a 1% stake or more suggest board candidates on the proxy. And sweeping legislation proposed by Senators Charles E. Schumer (D-N.Y.) and Maria Cantwell (D-Wash.) aims to set up a Shareholder Bill of Rights that would let investors nominate directors and separate the chairman and CEO roles, among other things. If passed, says John S. Wood, vice-chairman of executive search firm Heidrick & Struggles (HSII), it "would have a bigger impact than Sarbanes-Oxley."
Companies are fretting about the potential impact of these moves, which could dramatically alter the way boards are elected. "There is considerable concern," says Holly J. Gregory, a partner at Weil, Gotshal & Manges who counsels corporations on governance matters. David P. Williams, the CFO of $1.1 billion health-care and plumbing provider Chemed, the subject of a proxy fight this year, worries that some shareholders' nominees may have a short-term perspective. "Management really tries to run things for the long run," he says.
For years shareholders have fought for "proxy access," which lets them nominate their own directors on the company's proxy, avoiding the often hefty cost of mailing their own ballots. Richard C. Ferlauto, who heads up pension investment at the American Federation of State, County & Municipal Employees, calls it a "fundamental shareholder right."
Currently, shareholder-nominated directors are relatively rare. There have been only 67 shareholder contests for board seats so far in 2009, according to RiskMetrics (RMG), 51 of which have been successful. One reason for the reticence: the expense of putting forward candidates. Broadridge Financial Solutions (BR), a securities processing firm, estimates that shareholders spend an average of $368,000 per contest on mailings, legal fees, and public-relations expenses in proxy fights. The cost of waging a campaign at big companies can easily run into the millions. Delaware's amendments, though not as far-reaching as the SEC proposal, could still have a big impact because they allow bylaws for reimbursement of expenses.
At the least, the new proposals may force greater dialogue between investors and boards to settle disputes. "Now that the stick is present," says RiskMetrics special counsel Patrick McGurn, "they're going to be even more willing."