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Facilitated by the Internet and a bear market, shareholder activism is on the rise--and shareholder proposals remain an attractive tool that can be used to place pressure on management. Recently, an expert panel dissected the current trends, issues, and pitfalls, including: (1) what issues are most likely to be raised and supported by shareholders in proposals; (2) how to apply the Securities and Exchange Commission (SEC) Staff's latest guidance, including Staff Legal Bulletin No. 14; (3) challenges in negotiating settlements between management and proponents; and (4) the latest techniques being used--including online activity--to seek support for a shareholder initiative.
This is an excerpt from a teleconference program held in late November 2001, hosted by RR Donnelley Financial's RealCorporateLawyer.com. and moderated by Broc Romanek. The panelists involved in this discussion were the following:
* Martin Dunn, Associate Director (Legal), Division of Corporation Finance, SEC
* Pat McGurn, Director of Corporate Programs, Institutional Shareholder Services
* Nell Minow, Editor, The Corporate Library
* John Wilcox, Vice Chairman, Georgeson Shareholder
* Beth Young, Corporate Governance Consultant, former Shareholder Initiatives Coordinator, AFL-CIO
Companies Should Attempt to Negotiate
MINOW: Well, I've got a revolutionary proposal, Marty.
DUNN: What's that?
MINOW: I believe you made a very good point earlier when you said that you're not serving your client well if you have not made yourself familiar with all of the available guidance. I would also like to say that I think you are not serving your client well if you do not attempt, before you go anywhere near the SEC, to try and negotiate these proposals. I think it's unfathomable in this day and age that there are still companies that go to the SEC without even having the courtesy to pick up the phone, call the proponent, and say, "We're very interested in your concerns. If you're a shareholder in this company, we really want to understand exactly what your concerns are and try to work with you."
The success rate of people who do that is phenomenal, and anyone that doesn't even give that a try is wasting everybody's time and money--so that's for starters.
With that in mind, let me agree with everything that Pat said. I would also like to add that when people call and ask me for advice on shareholder proposals, I normally tell them that now is not the time to be creative. Now is the time to find the most bulletproof proposal you can think of. If that's a "put a poison pill to a vote" proposal--which you know we're all as bored with as you are--then do it. Sell it to the investor community, the press, the employees, and everybody else you can think of as a vote of "no confidence" in management. In addition, then when you get your massive majority vote, you know that you have something to say when the company doesn't respond or doesn't respond effectively.
If you want to save yourself a lot of misery, you need to: (1) try to negotiate with anybody who files a shareholder proposal because very often the proposal they're filing may not be central to their concerns; and (2) if the proposal gets a substantial vote, respond to that in a meaningful way, instead of writing a letter saying, "Well, we thought about it really hard and we decided that the shareholders didn't really mean to support this proposal," which actually has been done.
Lack of Creativity This Season
MINOW: I think this is probably not going to be a time when you'll see a lot of creativity. I think you will see more of a focus on boards. Some of you already know that my next big project is developing a board rating system. Actually, we've already developed it. We're testing it now, and we will be sending "A" through "F" grades to every major board and ultimately to every director. I think you will see that kind of data being used by shareholders when somebody's got a board that has three "F" directors on it. You're going to see shareholders writing in saying, "You know we think that no one should be added to this board who doesn't have this kind of background in business, finance, and whatever the company needs."
Also, there may be some board eligibility proposals. I do think that there obviously will be proposals in response to September 11, dealing with security issues similar to what we saw with Y2K, requesting a report on what a company has done in terms of preparedness for some kind of terrorist attack in the future. You will also see much greater sensitivity on national security. There's a small firm that's done some wonderful work that made a presentation to the IRRC clients recently about their ability to pick out which companies are doing business in countries that either support terrorism or have other kinds of national security issues. You'll see a lot more focus on that.
The one social issue that I don't recall Pat mentioning, that I wanted to mention, is the global reporting initiative sponsored by the California Environmental Resources Evaluation System (CERES). I think you're going to see that a number of companies have voluntarily decided to provide that environmental disclosure. I also think you'll see more focus from shareholders asking for that kind of data.
Changes Caused by New Technology
MINOW: I promised that I would talk a little bit about how technology has made a difference. I hope you're all familiar with the story of United Companies Financial, in which the stock had gone from $1 to 10 cents. It …