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Shareholders Find a Voice

June 01, 2002

The stock market long has been a game of knowing when to hold and when to fold. The post-Enron surge in shareholder activism brings another option--fighting against self-serving management proposals that do not put investors' interests first.

Investor activism clearly is being stoked by two years of a bear market and the reality that it's no longer easy to dump troubled shares and shift investment dollars to greener pastures.

It's also being driven by the California Public Employees' Retirement System and other big institutional investors that corporate boards ignore at their own peril.

The Teachers Insurance and Annuity Assn.-College Retirement Equities Fund, a pension fund for educational and research institutions, in the last year has submitted 13 resolutions that call for shareholder approval of executive compensation packages. The fund also wants corporations to adopt measures that would safeguard the independence of accounting firms that conduct financial audits.

The activists are gaining ground after years of being brushed aside by boards of directors following agendas set by corporate executives. Shareholder resolutions used to get soundly trounced--or management simply refused to place initiatives on ballots. But during the last year, 39% of shareholder resolutions dealing with stock option plans, accounting concerns and other corporate governance issues won majority votes, according to the Investor Responsibility Research Center in Washington.

The wave of activism should lead to related reforms. The Securities and Exchange Commission should start by prohibiting corporations from categorizing executive compensation packages as "ordinary business" instead of a "significant policy issue." It's an important distinction because executives are using the designation to stymie shareholder votes.

Corporate boards are free to ignore shareholder resolutions because they're nonbinding. Publicity generated by shareholder victories sometimes forces embarrassed managers into action. But stock exchanges could also require companies that trade on their exchanges to abide by resolutions that repeatedly win shareholder support.

Going up against management often is an expensive and time-consuming process, but persistence pays off.

After almost a decade of fighting, shareholders of ICN Pharmaceuticals on May 29 secured a board majority that probably will end the reign of Chief Executive Milan Panic. The bitter fight to oust a company founder who survived government investigations, sexual harassment accusations and a wave of investor complaints is a good example of shareholder rights in action.

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