Shareholder Voice

Any one who is navy will tell you that it takes some time to turn a battleship around.  The heavy ship has such strong inertial momentum that it responds with agonizing slowness to changes in the helm.  But the ship will turn.

In the last several weeks there has been a steady drumbeat of small news items that indicate that shareholders are slowly gains a degree of control in American corporations. 

Both Exxon and General Motors announced last week that the companies would adopt majority voting requirements in uncontested director elections.  Director nominees must win a majority of the votes cast or submit their resignations to the board.  The two high profile companies join Home Depot, Pfizer, Intel and Motorola in adopting the bylaw.

Several companies, including Federal Department Stores and Baker-Hughes, have, in response to shareholder requests, agreed to hold shareholder votes on whether to do away with “staggered boards” in favor of “straight boards.”  A company with a staggered board elects only third of its directors in any given year.  A company with a straight board elects all its directors annually.

Several shareholders have won victories in proxy fights, traditionally a contest rigged for incumbent managers.  There are more than double the number of proxy fights in 2006 than any previous year.  Nelson Peltz won seats on the board of H.J. Heinz and successfully pressured Wendy’s International for board seats.

Annual shareholder meetings, once held in a lawyer’s conference room, now feature robust exchanges in question and answer sessions with the company CEO.  Wal-Mart holds its annual meeting in a 15,000 seat arena.  Starbucks meetings attract 5,000 shareholders. The Home Depot CEO was embarrassed by a shareholder question asking for an introduction of the company’s directors; they were not there.

Shareholders selling into management led leveraged buyout (LBOs) at Kinder Morgan and United Health are questioning actively the ethics and procedures for the managers, board, and advisers who are pushing the deals.

And in the background is the discussion at the Securities and Exchange Commission on whether to keep or modify its “shareholder resolution” rule that, as recently interpreted by a federal circuit court, that allows shareholders to request company wide votes on whether shareholders could nominate directors for inclusion on the company’s proxy card.

Companies’ new responsiveness to shareholder requests may be, in part, a result of the companies’ attempts to look good for the SEC and thus have more bite to their arguments to the agency to narrow the rule.

Shareholders that use the SEC rule to submit “social-policy resolutions” to a shareholder vote have found that affirmative votes for the resolutions are up.  The resolutions in the past have struggled to get even a small percentage of the vote.  In 2006 there is a thirty-eight percent increase in the number of resolutions that get more than ten percent of the vote.  The favorite is a resolution requiring companies to produce “sustainability reports” on the effect of company operations on the environment.

Embarrassments at Hewlett-Packard have cost top managers their jobs and led to a nation-wide discussion about paranoia over board media leaks.  Managers who back- dated compensatory stock options are facing pressure to explain themselves or resign.

Independent directors, those who are not also on the company’s executive management team, are meeting without the inside directors, developing their own channels of information inside the company, and hiring their own independent advisors.

Yes indeed folks, the battleship of corporate governance has begun to swing around –toward more shareholder voice.