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Speaking Up as a Shareholder

How Your Voice--Even by Proxy--Can Affect a Company's Performance

May 12, 1996|KATHY KRISTOF

At this time of year, when individual shareholders find their mailboxes filled with thick envelopes with proxy statements from public companies that they own, many of them participate in a form of benign neglect.

They drop them on tables and counter tops. They stuff them in drawers. They frequently never bother to read them.

Not Nell Minow.

When she receives these annual statements, she springs into action. She scans each statement looking for telltale signs of bad governance--rules that could cost shareholders money. When she finds them, she does something about it too.

Admittedly, Minow is no average shareholder. She's a money manager with Washington-based Lens Inc. (whose published investment minimum is $5 million), who makes her mark by investing in companies with sorry shareholder rules. She then gets these companies to alter their policies in shareholder-friendly ways, which boosts the long-term value of her holdings. The end result: Lens has beaten the performance of the overall market in three out of four years.

According to a recently released survey, that shouldn't be a big surprise. The way a company is governed--the rules and regulations that relate to both shareholders and management--correspond closely with a company's long-term performance, says an extensive survey by the National Council of Individual Investors.

"We look at corporate governance as a longer-term indication of the value of that stock for the investor," says Gerry Detweiler, NCII policy director. "You can certainly have a company with strong financial performance and lousy shareholder policies, but over the long run, it appears that companies that have good governance policies tend to rebound faster when their stock starts to slip."

So instead of cursing your brokerage firm for forwarding all that junk mail, consider reading what's there and voting. Increasingly, reforms have a shot at getting majority shareholder approval.

Although most reforms that pass are backed by large pension funds or wealthy individuals with large blocks of stock, individuals can also help sway corporate governance policies, boosting the long-term value of their holdings in the process, adds Minow, who has also written several books on the relationship of corporate performance and corporate governance. Now that annual meeting season is in full swing, individual investors would be wise to take a close look at just how well their companies are governed and how they perform when compared with their peers.

But what should you watch out for? There are red flags, says Kenneth Steiner, co-founder of the Investors Rights Assn. of America in Great Neck, N.Y. Specifically:

* Poison pills, which are triggered when an unfriendly suitor buys more than a specific percentage of the company's stock to discourage the takeover.

* Golden parachutes, which guarantee large lump-sum payments to managers when they're fired after a change of control.

* Option repricing. After steep market drops, many companies have dropped the exercise price of executive stock options. But, since no one will eliminate the losses on your holdings, you should be skeptical when the company does that for management, Steiner says.

* Staggered boards, where only a small portion of the board is elected each year.

* Related directors. Ideally, the majority of a company's board should be made up of independent individuals, who neither work for the company nor sell the company goods or services. People who are related by blood or marriage to top-level employees are also not considered independent. Red flags rise when a substantial portion of the board or the members of key committees, such as audit or compensation committees, are mainly composed of insiders, activists maintain.

* Director pensions, compensation and stock ownership. The amount of stock that directors own has a big impact on the company's long-term performance, Minow says. Directors should own stock worth three to five times their directors fees, she says. Meanwhile, the promise of a pension can affect a director's independence.

Conveniently, all these red flags are easy to find in the company's proxy statement. All you have to do is read the document to see if they're there, Minow says. However, in the interest of saving time, Minow suggest that shareholders first look toward the back of the proxy for the performance graph. This chart shows how your company's stock has performed relative to the market as a whole and to a group of its peers over a five-year period. If the company compares favorably, you probably don't need to bother, she says. The company is clearly doing something right.

But if not, and red flags wave from every corner of the proxy, shareholders should seriously consider either advocating change themselves or voting for others who have advocated it already.

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