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A Shift Toward Shareholder Rights

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In corporate America, shareholder rights are finally coming into focus. As shareholders secure more significant victories in the boardroom, executives are taking notice. So should investors. Now's the time to recognize the possibilities and responsibilities inherent in investing.

Freeing up choice
On Wednesday, the Securities and Exchange Commission decided on the proxy access rule, which governs shareholders' ability to nominate their own candidates to replace ineffective boards at poorly managed companies. The final rule aligns with expectations: Investors must hold 3% of shares before they're allowed proxy access.

However, the three-year holding period before shareholders can nominate directors may be a little longer than corporate-governance watchers were hoping for. The California Public Employees' Retirement System (CalPERS) had previously pointed out that a holding period of more than two years represents an impediment to activist shareholders' efforts to push for important changes at companies.

Don't believe the hype from those in the business community who are freaking out about the proxy access rule. They claim that lunatic fringe shareholders will cause boardroom pandemonium, but the 3% ownership threshold and three-year holding period won't make such activism easy in the least.

In addition, don't let yourself be brainwashed: Shareholders are still free to vote for whichever director candidates they wish. If an off-balance activist tried to nominate Karl Marx to the board, nobody would force shareholders to vote "yes." (I mean, for one thing, he's been dead for more than a century ...) American shareholders are still free to figure out what's in their best interest.

The operation was a success
In other news, another big activist shareholder, the California State Teachers' Retirement System (CalSTRS), pronounced the 2010 proxy season a success. It said it withdrew 21 of the 28 shareholder proposals it filed this year, after successfully agitating for corporate governance changes at those companies. That seems like an incredible turn of events to me.

CalSTRS reported successes at companies like NutriSystem (Nasdaq: NTRI  ) , Liberty Global, and EXCO Resources (NYSE: XCO  ) on board diversity issues. Meanwhile, shareholder proposals at Ball (NYSE: BLL  ) and Precision Castparts (NYSE: PCP  ) passed votes with large percentages of shareholder support.

That said, CalSTRS suffered a few setbacks as well. Several votes, including proposals at Chesapeake Energy (NYSE: CHK  ) , ConocoPhillips (NYSE: COP  ) , and Forest Laboratories (NYSE: FRX  ) , failed. But they did receive considerable shareholder support, and CalSTRS said it will continue to press the companies on those issues.

Many public companies must be taking note of the increasing number of corporate governance-related proposals gaining major support from shareholders. I'd venture to guess that many executives now feel compelled to rethink any stubborn disregard for shareholder opinion they may have previously shown.

Next up: Say on pay
The battle for good governance will only get more interesting. The Dodd-Frank Act gave the SEC the directive to implement say-on-pay rules, giving institutional investors a vote on executives' pay packages. Again, don't believe corporate lobbyists' hysterical hype about the supposedly disastrous effects of this change. Say-on-pay votes will be non-binding, so nobody's forcing companies to do anything -- except maybe listen to their shareholders' displeasure.

This rule could help reduce excessive compensation, and prevent executives from getting paid lavishly for failure. Shareholders who stay alert and vocal, rather than lapsing into apathy, can do far more to rein in these unproductive policies.

Don't sell yourself out
I'm shocked by how many investors still defend boards' and executives' unfair and illogical practices. Plenty of managers felt no such compulsion to defend shareholders' interests when they ran their companies into the ground, collected years of outrageous paychecks along the way, then departed the wreckage with lucrative golden parachutes.

As part-owners, shareholders have a responsibility to actually think about how their businesses are run, and whether they're built for the long term. Making sure a company isn't headed by crooks who pillage shareholder capital, or being run into the ground by short-term thinking, really is in shareholders' best interest. Constantly defending managers' "rights" to do whatever they want with nary a protest? Not so much.

We investors shouldn't sell ourselves short -- or sell ourselves out -- anymore.

Check back at every Wednesday and Friday for Alyce Lomax's columns on corporate governance.

Precision Castparts is a Motley Fool Stock Advisor recommendation. The Fool owns shares of Chesapeake Energy, which is a Motley Fool Inside Value choice. Try any of our Foolish newsletter services free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned. The Fool has a disclosure policy.

Read/Post Comments (6) | Recommend This Article (21)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 27, 2010, at 3:34 PM, rd80 wrote:

    The WSJ coverage of this included this quote,

    "Hedge funds, pension funds and labor unions have pushed for the rule for years, contending that corporate boards have little incentive to be responsive to shareholder concerns because they rarely face contested elections."

    If hedge funds, pension funds and labor unions are the folks lobbying for it, I'm very suspicious that it isn't in the best interests of individual investors.

  • Report this Comment On August 27, 2010, at 4:50 PM, ChrisFs wrote:

    I'm very happy about this turn of events. Since shareholders are the "owners of the company" and the Board simply runs the company for them, it seemed a huge farce that shareholders did not have a say on pay or couldn't replace Board members at their whim.

    It's flies in the face of the concept "owner of the company".

    No one forced these companies to go public, they did so to have access to more money, but along with that comes tradeoffs.

  • Report this Comment On August 27, 2010, at 4:52 PM, ChrisFs wrote:

    "If hedge funds, pension funds and labor unions are the folks lobbying for it, I'm very suspicious that it isn't in the best interests of individual investors."

    And yet WSJ and and it's new owner, Rupert Murdoch,

    has a bad record of looking out for the small investor as well.

  • Report this Comment On August 27, 2010, at 7:22 PM, tobernator1000 wrote:

    I wouldn't mind voting for a deceased board member. At least he wouldn't expect a paycheck to sit around and do nothing to protect shareholder interests. :)

  • Report this Comment On August 29, 2010, at 3:59 PM, Global10 wrote:

    What a joke. They will continue to make the money one way or another while the middle class will continue to suffer. I have not seen a cost of living raise in 20 years. Now this dam recession will give them more excuses to cut our pay only to see them live high on the hog. We need to stand up and kick some ass!!!!

  • Report this Comment On August 31, 2010, at 4:56 PM, TMFLomax wrote:

    Thanks for sharing your thoughts on these issues, folks!



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