FOOL ON THE HILL
Late last year, Rodger Garfinkle, a long-time shareholder of Apple Computer, decided to address some of the company's poor corporate governance actions. His idea wasn't novel -- thousands of people write shareholder proxy votes -- but his approach was. Rodger took his ideas to our Apple discussion board and encouraged assistance and support from fellow Fools.
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Rodger Garfinkle, who posts on the Fool discussion boards as RodgerRafter, oughta have a different nickname. He should call himself "Doctor." The companies he owns don't like to see him coming, but in the end, he's just trying to help them to get better. Rodger is an activist shareholder. Oh, sure, everyone who's ever read a proxy statement (you do read the proxy statement, don't you?) has seen shareholder proposals submitted by activists. Many times, they relate to things like working wages in Third World countries, environmental considerations, or other pet interests of a certain subgroup of shareowners. To say that these proposals rarely succeed would be an insult to the things that actually succeed sometimes -- like blue moons and Halley's comet. Shareholder proposals never succeed. Rodger's pet interest is a little bit different, though. He wants to help make the company more attractive to shareholders. He's a corporate governance activist, and his most recent campaigns highlight the power of information in uniting shareholders. You see, as I write this, Rodger's on his way to Apple Computer (Nasdaq: AAPL) headquarters in Cupertino, Calif., to meet with Apple's chief financial officer, Fred Anderson. Rodger's not a big fund manager or even a big-time private investor -- he's a long-term individual investor who saw some things in Apple's management of his money that he didn't like, and he decided to do something about it. He publicized his concerns and got comments from other shareholders. He called investor relations. He wrote letters to management. And finally, Rodger made several shareholder proposals that he hopes to have included in Apple's proxy. Rodger's done the same with another company, Books-a-Million (Nasdaq: BAMM). His experiences are a testament to the power of the Internet, the power of the individual shareholder, and as Rodger puts it, "Companies are actually very eager to hear from their shareholders." I would add to this, "in some forms." Yesterday, the SEC voted that mutual funds must begin disclosing to their customers how they voted on shareholder proxies. I am deeply supportive of such a measure for several practical reasons, but they center around one philosophical one: Mutual funds do not own shares in any company -- their shareholders own them. It is the mutual funds' job to manage these shareholdings in the best interest of their customers. An important component of management is voting in proxies. If a mutual fund manager doesn't vote against a massively dilutive compensation package for a company's executive, would you say he's managing in the best interest of his shareholders? I wouldn't. I suspect many mutual funds were opposed to this new rule not because of how they voted, but because they didn't vote at all. There's a heavy correlation between the rising percentage of corporate assets controlled by mutual funds and the most recent drop in professional standards at U.S. corporations. In such an environment, where a large portion of ownership is disinterested, why wouldn't executives take advantage of the situation? And for individual investors, who watch as the corporate looting of shareholders takes place without so much as a peep from most big institutions, is there an outlet for their frustration other than just to sell? Rodger's experience suggests that there is. In October, he suggested on the Apple discussion board (free trial required) that the company should combine efforts and draft shareholder proposals on such corporate governance issues as changing Apple's stock option accounting, stock buybacks, and the composition of its board of directors. In each case, Rodger spelled out how he believed actions by company executives had been counter to the interests of shareholders. He described sins in Apple's share buyback practices thusly: During 1999 and 2000, Apple fired up its own share repurchase program and bought back 5.05 million shares at an average price of $37.82. This, of course, was a bad use of the program that ended up driving up the price so that managers could make handsome profits on their options. Former VP Mitch Manditch skipped town with over $30 million in profits after only three years service to Apple. Yet, now, with the stock trading barely above the value of Apple's cash in the bank [note: the stock traded at $14.11 at the time], management appears reluctant to make additional purchases at a fraction of the price. I'd agree that this is a significant problem -- how can Apple's management find the stock price cheap at $37 and expensive at $14, even though they have nearly that much per share in cash? This, in the end, was the problem Rodger elected to address, and he did so garnering input and support from other Community members throughout the process. Other Fools submitted two additional proposals. As it stands, Apple is trying to exclude Rodger's proposal from the proxy statement on procedural grounds. Whether his proposal succeeds or not is, of course, important to him and his fellow Apple shareholders. But the existence of the proposal is just as important. Companies should know that (a) shareholders are interested; (b) shareholders are watching them; and (c) we're willing to speak out against actions we don't like. Further, though stock ownership in companies is generally hopelessly dispersed, Rodger's participation in The Motley Fool Community allowed him to get the word out and receive feedback and support from scores of people. Rodger intends to set up a separate discussion board on Fool.com to assist others who wish to write shareholder proposals. "It's easy once you know the process," he said. So, do you want to submit a proposal for a shareholder vote at a company in which you own shares? There are some limitations. You have to prove that you have owned the shares for over one year, with a minimum ownership of $2,000-worth. Your proposal and all supporting statements must be no longer than 500 words. Other procedural issues are spelled out pretty well in this University of Cincinnati Law School document. And that's about it. Oh, yeah. You need a topic, and it can't be something like, "Please switch to decaf in the coffee room." Anything referring to business operations will get nixed. All too few investors take advantage of this important avenue. It's always stunning that we place so much wealth in the hands of corporate executives, and yet less than 25% of all investors ever read an annual report. That's not investing; that's madness. But when you see something going wrong -- when you sense a company isn't acting in your best interest -- get on the phone, send investor relations an email, demand answers. If they're not forthcoming, think about Rodger Garfinkle: He's meeting with the CFO of one of the largest computer companies in the world, just because he asked. Fool on! Bill Mann has no idea where his car keys are. At time of publishing, he owned none of the companies mentioned in this article. He is managing editor of The Motley Fool Select, where you can find his best Foolish stock ideas you won't find anywhere else. The Motley Fool has a disclosure policy. Catch Bill every Tuesday and Thursday on Online Tonight With David Lawrence.
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