Institutional investors apply more pressure to corporations
Emboldened by new regulations — and angered by laggard stock performance and recent scandals — this new crop of activists is voting down company policies and backing proposals to reform corporate boards.
New York Times News Service
Proxy season has long been the domain of labor unions and activist investors with large personalities and forceful demands, increasingly it is mutual funds and other more tempered institutional shareholders criticizing lavish pay packages and questioning corporate governance.
Emboldened by new regulations — and angered by laggard stock performance and recent scandals — this new crop of activists is voting down company policies and backing proposals to reform corporate boards. The movement has already stung a variety of companies, including Citigroup, Goldman Sachs and Wal-Mart.
At its annual shareholder meeting in Oklahoma City on June 8, Chesapeake Energy confronted an army of angry institutional investors shouting for a shake-up at the embattled company. Shareholders, already exercised about the company's underperforming stock, seized on revelations that Chesapeake's chief executive took personal loans from the company's lenders.
And the effort is bearing fruit. On Thursday the company named a new chairman to replace its controversial founder, Aubrey McClendon. But he remains as CEO and president.
"Chesapeake is an excellent example of the changing impact of shareholder activism and the effectiveness of that activism," said Charles M. Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware.
"Years ago, it was really just the large pension funds and labor funds," he said. "Today you're seeing a very wide mix of people." Elson noted that one of Chesapeake's chief critics is Southeastern Asset Management, a large money manager known as a low-key investor.
While levying a more potent attack than the average shareholder, big money managers and mutual funds are a small segment of the activist population. Large union-affiliated pension funds and select individual investors remain the most dogged harassers of corporate boards and executives, data shows.
The number of shareholder proposals, one measure of activism, grew by 3 percent this year to 595, according to Broadridge Financial Solutions, a technology company that processes proxy votes.
Even a modest rise is significant because new regulations made certain votes mandatory, meaning that shareholders no longer had to put them on the ballot.
"We're looking at a bumper crop of proxy fights," said Patrick McGurn, special counsel at Institutional Shareholder Services, which advises on proxy voting. "It looks like we'll see more fights during the first half of 2012 than we tracked for the entire year in 2011."
Shareholders have taken broad aim at corporate governance. They paid particular attention to so-called classified boards, in which directors serve terms of different lengths.
The number of declassification proposals shot up 41 percent this year, to 79 proposals, according to Institutional Shareholder Services. The growth stemmed in part from an initiative by Harvard Law School's Shareholder Rights Project.
A series of recent management mishaps has given investors plenty of ammunition. At Yahoo, a firestorm erupted when it emerged that the company's chief executive, Scott Thompson, misstated information on his resume. The hedge fund Third Point, a major Yahoo shareholder that started pushing for change earlier this year, called for Thompson to step down in May, which he soon did. It was the hedge fund's first real activist fight in five years.
Wal-Mart has faced intense scrutiny from prominent shareholders. In the wake of a New York Times article exposing bribery in Wal-Mart's Mexican arm, the nation's second largest public pension fund, the California State Teachers' Retirement System, sued the company and voted against all of its board members.
The pension fund railed against "a breakdown of corporate governance."
While the skirmish has yet to yield changes at Wal-Mart, other embattled companies are making concessions. Last week Chesapeake appointed four new directors that were hand-picked by its two largest shareholders, Southeastern Asset Management and Carl Icahn.
"We believe Chesapeake is now heading in the right direction," Icahn said.
"When traditionally quieter investors join the chorus, it resonates so much more," said Dominic J. Auld, a lawyer at Labaton Sucharow who represents institutional investors in challenges against public companies. The board of Goldman Sachs was among the recent targets. In April, the managers of Sequoia Fund took aim at James A. Johnson, the chair of Goldman's compensation committee. The shareholders issued a broad rebuke of Johnson's corporate career, specifically his tenure as chief executive of Fannie Mae, the mortgage finance titan that collapsed.
Citigroup shareholders in April rejected the bank's $15 million pay package for its chief executive, Vikram Pandit.
"We're not trying to be activists," said Brian Wenzinger, a principal at Aronson Johnson Ortiz, a Philadelphia money management company that voted against the Citigroup pay package. "Shareholders are paying attention to what CEOs are getting paid. Investors can't ignore it anymore."