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Shares That Count

June 10, 2003

Corporate management traditionally treated shareholder resolutions as the work of lone gadflies. The best example was probably John Gilbert, who attended dozens of annual meetings for decades until his death in 2002 and occasionally wore a clown costume while demanding better corporate governance. Now, with bigger, more powerful shareholders joining crusades for better management practices, dissenters don't need a clown nose to get attention. Successful shareholder resolutions are up 50% this year over recent years.

Chief executives, chairmen and corporate directors who really care about the bottom line should be listening, because studies suggest that truly responsive companies are stronger financially.

Many corporations still respond to successful resolutions with a polite promise to take shareholder votes under advisement. But brushoffs are harder to explain to pension funds and other large investors now weighing in on everything from stock option accounting practices and how board members are elected to protecting rain forests and securing rights for gay employees.

Companies with a poor record of defending shareholder rights "earned significantly lower returns, were valued lower, had poorer operating performance and engaged in greater capital expenditure and takeover activity," according to a 2001 study of 1,500 publicly traded companies by the nonpartisan National Bureau of Economic Research.

Corporate executives shouldn't bow to every shareholder whim; management by ballot box can be as destructive in business as in government. However, there's a good reason for the rapid rise in resolutions, and the growing number that win majorities: doubts among shareholders about where management's loyalties lie.

The Securities and Exchange Commission should help restore investor confidence with rules that allow shareholders to nominate board members directly rather than just voting yea or nay on management's handpicked slate. Stock exchanges should require corporations to adopt resolutions that receive a majority several years in a row.

Some companies are responding quickly when shareholders speak. FedEx Corp., for example, agreed to create a nondiscrimination policy with regard to sexual orientation. Domini Social Investments, a fund manager, said it would withdraw its resolution after FedEx agreed to amend its policy.

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