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July 13, 2006 4:22 PM Age: 11 yrs

Background / Perspective on the nature of Shareholder Activism

Category: SRI Research & Insights, SA Research & Insights
Source:  Hank Boerner

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Some shareholder advocates stress this:  Shareholders are partial owners of the enterprise – they point out that they hold shares (stock) issued by the company in their own retirement accounts, in personal portfolios and indirectly, as indirectly as beneficiaries of public, private or labor pension funds, or as investors in the thousands of mutual funds offered by financial services firms.  Therefore, their message to boards and executives is: Treat us like owners!

A growing number of investors are paying very close attention to the policies, practices and behaviors of the companies they hold shares in – and as famed investor Warren Buffett advised, if you are not willing to own the entire enterprise, don’t invest even in a tiny portion of it…in the form of common shares. 

In recent years, both institutional and individual shareholders have become more vocal about --and more directly involved in – certain of the affairs of the companies in which they invest their own funds and act as trusted fiduciaries. 

How vocal?  Shareholders may crowd into the annual public meeting if they don’t like what is going on, to raise their individual and collective voices and to ask tough questions. Or, they may mount political-like campaigns at annual proxy voting time.  Investors such as public employee pension fund managers will ask corporate management to explain policies or performance, and if the dialogue does not resolve differences, the investor could mount a public campaign -- usually in the form of a shareholder-sponsored proxy resolution calling for change, or demand a public explanation (such as what the company intends to do about the long-term effects of global warming), or attempt to deny re-election to a director they object to on various grounds. 

At one time, institutions would do “the Wall Street Walk,” selling off (divesting) the shares of the company; today, more institutional investors are staying put and mounting public campaigns for change which have resulted in the CEO, members of the “C” suite team, and even board members doing the walking.

Rights of the Shareowners

What “rights” do partial owners of the corporation enjoy?  Depends on who you ask.  Large modern industrial enterprises have a clear separation of [share]ownership and day-to-day management, with shareholder-elected boards of directors looking after the shareholders’ interests and holding management accountable (ultimately, to the owners). 

The authors Adolf A. Berle, Jr. and Gardiner C. Means set all this out more than 70 years ago in their landmark work, “The Modern Corporation and Private Property” (still in print and used in many classrooms). The managers of the enterprise, in their view, would eventually enjoy most of the benefits of daily involvement in the affairs of the enterprise, and shareholders would be satisfied to receive an adequate return on their investment.  Reward for risking their capital.

As Berle and Means presciently observed:  “As ownership of corporate wealth has become more widely dispersed (this was written in 1931), ownership of that wealth and control over it have come to lie less and less in the same hands (e.g., the founders and their direct interests).  Conceivably, [control] can be exercised without any such interest. (Such as executives or boards not owning stock but enjoying the fruits of the enterprise.)  Ownership of wealth without appreciable control [and] control of wealth (the enterprise) appear to be the logical outcome of corporate development…”  (How far-sighted they were!)  (Copyright 1932 by The Macmillan Company.)

Standing to Account

Once each year the directors and management “of the issuer” stand to account to shareholders – in the form of the annual nomination and election of members of the board and in the vote for resolutions that addressed important matters of the enterprise (not usually the ordinary day-to-day of the business, which was the responsibility of corporate management). 

A handful of shareholders – activist pioneers such as Evelyn Davis and John and Lewis Gilbert – began challenging boards and managements by filing resolutions for vote by shareholders.  (The Gilberts began challenging companies in the late 1920s and early 1930s and kept at it into the late-1990s.) The rules of the game were difficult for activists and their resolutions and other challenges were easily swatted away by companies.  But over time, other shareholder interests began to join in the effort and saw shareholder-sponsored resolutions as an effective means of holding boards and executives more accountable to shareholders.  

The Process

A shareholder owning more than $2,000 worth of voting stock for more than one year can request [of the corporation] that a resolution be placed on the annual ballot for an all-shareholder vote. (The proposed resolution must conform to the rules set out by the Securities & Exchange Commission.)   The resolution must be “relevant” – such as relating to matters that affect five percent or more of the company’s assets and at least 5% of net earnings and gross sales; it can’t conflict with other resolutions on the same issue, etc.

In recent years as the SEC and other regulators changed the rules governing the proxy process, such as authorizing shareholder-to-shareholder communication or advising fiduciaries to vote shares held in trust, proxy contests became a popular arena for a variety of shareholder activists and advocates, including:

  • Those shareholders who argue that appropriate form, structure and function – embodied in critical corporate governance issues – will drive corporate performance; they’ve often packaged their proposals as “improving corporate governance.”
  • A small number – including Robert A.G. Monks of Lens Fund and Ralph Whitworth of United Shareholders (now CEO of Relational Investors) – arguing in the early 1990s that removal of under-performing CEOs (such as the heads of IBM, Sears, Westinghouse, Eastman Kodak, General Motors, and other large cap companies) would lead to improved corporate performance and greater valuations for company shares.
  • Corporate “raiders,” making runs at companies that they thought should be restructured to “unleash shareholder value,” financed by investment bankers (including Michael Milken.)  Some former raiders are still at it – in early 2006 Carl Icahn was demanding changes at Time-Warner, including seats on the board for his own candidates.
  • Public employee pension fund trustees and managers singly and collectively leveraging their holdings to address societal issues as part of their assumed fiduciary duties.  The Council of Institutional Investors (CII) is the trade association where ideas are shared and some campaigns take shape.
  • Labor unions addressing issues critical to their members through the proxy ballot box.  (AFL-CIO has as full-time team on point for shareholder advocacy.)
  • Even individuals get in the game – John Chevedden of California has sponsored as many as 11 resolutions that have won majority votes.  Entrepreneur Sam Wyly, who sold his entrepreneurial company to Computer Associates (CA), later spent millions of dollars taking on CA management in proxy battles.
  • Beginning in the early 1970s, mainline religious denominations, orders, medical systems and others who (in the words of Interfaith Center on Corporate Responsibility) were grounded in faith and committed to action, using shareholder activism to advocate for improvement in corporate commitment to social action.  Their breakthrough campaign was the anti-Apartheid movement over a 20-year period that united faith-based and like-minded investors in today’s ICCR, with $130 billion in collective assets.

Eventually (over two decades) more than 200 US government agencies at state and municipal levels would adopt anti-Apartheid codes for their investment / divestment and/or debarment of corporations doing business in South Africa.

In time, these “social-“ and “faith-based” investors forced divestiture of shares of American companies doing business in South Africa, persuaded US companies to leave the Union of South Africa, and helped to bring down the hated system of Apartheid.  Many of the same activists are lining up today to address genocide in the Sudan.

2006 – Focus on Darfur-Sudan

We see echoes of this campaign in today’s investor focus on the Sudan, with US State Department characterization of killings in the African country’s Darfur region as genocide.  In recent months, activist and investor attention is focusing on non-US headquartered companies -- such as Siemens and Shell Oil -- which US institutions hold in their pension and other portfolios as well as US firms whose subsidiaries do business in / with Sudan. (US pension funds are diversifying investments and asset allocation often means direct ownership of foreign issues.) 

During the activist, shareholder and public sector campaigns to end Apartheid in South Africa, more than 200 governmental agencies (states, municipalities, counties) adopted measures that included divestiture of stocks of US companies continuing to do business in South Africa, or, debarment and bars to purchasing goods and services of those companies.

A new social justice movement is sweeping through state legislatures, with New Jersey, Illinois and Oregon already adopting similar laws to deal with Sudan affairs.  The largest state employee pension fund – CalPERS (California) is also addressing the issue.  The New York City pension funds are engaged in dialogue with corporations on Sudan matters, but not yet resorting to the proxy ballot box as a campaign strategy for the funds.

Two recent developments:

KLD Research & Analytics, Inc. launched a “Sudan Compliance” service for investors, designed to help money managers and investors “implement engagement and/or divestment mandates” associated with publicly-traded companies doing business in Sudan. (Details on service at:

In December 2005 Northern Trust Global Investments announced creation of seven (7) new index funds to help state pension fund managers in Illinois – where the first legislation was adopted to address the Sudan issues – comply with divestment mandates. Northern Trust is constructing portfolios to minimize tracking variance caused by elimination of divested stocks in “Sudan-free” versions of Standard & Poor’s 500 Index, and others.  Information:

Accountability Central will post news of continuing developments on the Sudan campaigns.

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