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The Golden Age of Activism

For the first time in years, shareholders seem to be gaining greater influence in the companies they own. It appears that individual investors are beginning to take their ownership roles to heart, having tired of their previous passive routine. Just as significantly, it appears that public companies are taking the trend seriously.

Change is afoot
Shareholder activism has been around for quite a while, most noticeably in the shareholder proposals that show up in proxy statements mailed to investors and filed with the SEC. But until a few years back, most companies treated shareholders' resolutions as little more token statements of concern.

Activist shareholders were often perceived as cranks, troublemakers, or political agitators. But as serious issues like corporate governance and executive pay have taken center stage this year, shareholder activism seems to have become a more visible and effective vehicle to catalyze corporate change.

To check whether that hunch was correct, I consulted an organization with the inside scoop. Though it's currently caught up in the midst of the busy proxy season, Institutional Shareholder Services, or ISS Proxy, was kind enough to lend me some data regarding shareholder activism. ISS Proxy is tracking 1,087 shareholder proposals so far this year -- already a 6.5% increase compared with all of last year. (Some 75% of all proxies are filed this time of year.)

Not surprisingly, ISS Proxy is also tracking 280 shareholder proposals related to executive pay, a 65% increase over the number of similar proposals for all of last year. Data so far shows that some well-known companies are registering high shareholder votes to rein in pay. That's not exactly surprising, since new disclosure rules have thrown more light than ever on executives' compensation packages.

Some of ISS Proxy's data also supports theories about the increasing importance of shareholder resolutions, and the shrinking proportion of companies willing to completely ignore such non-binding but persuasive measures. My contact at ISS Proxy, Carol Bowie, particularly noted that classified or staggered boards -- often criticized by shareholder advocacy groups, since these structures place only a portion of directors up for re-election at any one time, and encourage long terms for directors -- have been steadily declining. Last year, for the first time, fewer than half (45%) of S&P 500 companies had classified boards, and their numbers have declined since 2003. That's important to note, since majority votes favoring the abolition of classified boards have been high for many years.  

Signs of resistance
Wherever you find change, you'll find backlash as well. I've repeatedly heard critics charge that public companies aren't supposed to be "democracies." To me, that sounds arrogant, entitled, and elitist.

The attitude that shareholders' opinions are mere annoyances may stem in part from heavy institutional ownership of major corporations. Those vast shareholding bodies tended to vote in lockstep with management's wishes, which may have given executives a false sense of free rein. In management's minds, shareholder opinion often took a back seat to a more myopic ivory-tower outlook.

That "like it or lump it" attitude -- "sell our stock if you don't like the way we do things here" -- implies that shareholders are merely a source of funding, and that investors dissatisfied with a company's operations have no recourse but to sell their holdings.

True, no company can or should be micromanaged entirely by shareholders. Executives run businesses because they're generally qualified to do so -- but their positions don't automatically make them perfect for their roles, and they often seem to forget that they're still employees of the companies they head.  

Critics also allege that shareholder demands, especially concerning plush executive pay packages, may cause talented managers to jump ship to private companies. But isn't that sort of mercenary outlook exactly what we don't want in a responsible CEO? Do we really want managers who work only in their own interest, desire so little accountability and transparency, and lack passion for the companies they lead?

Fasten your seatbelts ...
Criticisms to the contrary, shareholder activism seems to be gaining momentum in corporate America. True, many current activists are hedge fund managers, gunning for better returns on their investments. But more institutions and mutual funds seem to be getting into the fray, too. Perhaps those sleeping giants are awakening to the idea that shareholder activism helps guarantee better governance -- and better returns. The growing activist trend among investors should also make Wall Street a lot more receptive to truly shareholder-friendly companies, which are already best-positioned with the knowledge, tools, and information to advocate on behalf of their clients.  

More and more corporations are taking shareholders seriously. Borders (NYSE: BGP  ) recently decided to "re-evaluate" a convertible notes offering just 15 hours after it announced it, citing "shareholder feedback." Wendy's (NYSE: WEN  ) spun off Tim Hortons (NYSE: THI  ) after investor Pershing Square's pressure. Applebee's (Nasdaq: APPB  ) may very well be sweating Breeden Capital Management's attempt to add directors to its board, not to mention Breeden's scathing criticism of the company's returns.  

Here at the Fool, we've seen the power of shareholder action firsthand at Flamel Technologies (Nasdaq: FLML  ) . Tom Gardner recommended Flamel for Motley Fool Hidden Gems in 2004. In 2005, Tom and the Hidden Gems team recommended that subscribers vote for resolutions to oust its management, proposed by dissident shareholders OSS Capital and BVF. With the help of Foolish shareholders, that changeover happened.

Is the ownership intrinsic in shareholding becoming less symbolic and more concrete? This could be the beginning of a vibrant time to invest, as more corporations acknowledge their accountability and responsibility to their stakeholders. Investor vigilance should create better companies, stronger leadership -- and happier, wealthier Fools.

Borders is a Motley Fool Inside Value recommendation. Flamel is a Motley Fool Hidden Gems pick. Try any of our newsletters free for 30 days.

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

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