Tuesday, November 27, 2007

AARP Bulletin: The Power of You

From the November 2007 AARP Bulletin:

The Power of You

Shareholder activism is increasing.The big issues are boards, company policy, CEO pay.

By Carole Fleck

November 2007

Americans own trillions of dollars in stock through pension funds, savings plans and as individual investments. And increasingly, they're using their clout to rein in corporate America, launching campaigns to dump a CEO, to change a company's unprofitable course or to go green. Retiree groups are among today's most active shareholders, confronting directors they consider overpaid and fighting for more generous health and pension benefits.

Shareholder activism has been on the rise ever since the Enron and MCI WorldCom scandals, when employees and shareholders lost hundreds of millions of dollars to fraud, says Amy Borrus, deputy director of the nonprofit Washington-based Council of Institutional Investors. "Directors realize they have to take note when shareholders raise concerns."

The increased activism is reflected in lawsuits, in legislative pressure on regulatory agencies and in the record number of shareholder resolutions submitted to American companies—more than 1,191 so far this year. Among the big issues are boardroom accountability, financial performance, executive compensation, labor practices, jobs, the environment and campaign contributions.

"The potential for activism by individual investors has never been greater," says Patrick McGurn, special counsel with the New York-based RiskMetrics Group. He says new media—including Internet blogs, group websites, YouTube and podcasts—have given investors a much bigger platform.

Stronger disclosure rules, particularly involving executive pay, have also prompted investor activism. The Securities and Exchange Commission has in recent years required companies to disclose information on executive compensation packages, the selection process for boards and how shareholders can participate in that process. But the SEC went in another direction earlier this year when it proposed a rule that would limit shareholders' rights to sponsor resolutions.

And in a case that is being closely watched by business groups, the U.S. Supreme Court is expected to rule on whether shareholders can hold third parties, like accounting or brokerage firms, accountable for fraudulently inflating a company's financial performance. AARP has filed a brief in the case urging the court to allow investors to sue.

Investor retirees have long challenged corporate behavior at telecommunications giant Verizon. C. William Jones, 69, president and executive director of the Association of BellTel Retirees, which includes Nynex, GTE, Verizon and Bell Atlantic, has been leading the fight to improve Verizon's pension and health benefits for employees and retirees. His group won three increases for retirees with minimum pensions starting in 2000.

His 100,000-member organization also fought to restrict executive compensation. According to Jones, it took as long as five years to persuade Verizon to pass, in 2003, the retiree group's proposal to reduce senior executives' retirement benefits, which were running five times higher than that of company managers. Jones, of Easton, Md., who with other retirees regularly attends annual shareholder meetings, produces a quarterly newsletter that keeps retirees informed of company practices and association activities.

"If the retirees and employees are asked to tighten their belt because of the health of the company, don't you think the top should lead by example?" says Jones.

When asked about shareholder activism, Verizon spokesman Bob Varettoni said in a written statement: "We've experienced consistent shareholder interest over time, mostly involving issues that impact many large companies such as ours."

General Electric retirees have also been successful in changing company policy through the shareholder process. Kevin Mahar, 64, president of the Local 201 IUE-CWA Retiree Association near Boston, which represents communications workers, including General Electric retirees, drummed up support from other retirees and, in 1996, won what he called the largest single increase in GE pension plan history. A second cost-of-living increase took place in 2000, he says, and a third will go into effect this year. GE employees and retirees, as a bloc, are the largest single holder of GE stock. Mahar has attended the last 12 GE shareholder meetings and says he used to take on then-CEO and fellow Irishman Jack Welch: "I used a little Irish humor, and he used it back at me."

James McRitchie, a former ethics officer at a California state agency who 12 years ago started an Internet site for shareholder activists, says many retiree groups and individuals use the Internet, including blogs and online videos, to boost shareholder involvement. What's important in any campaign, he says, "is to bring issues to the attention of other shareholders."

In a sign of what's to come for investor activism, consider Eric Jackson's grassroots campaign, which thrives on new media. The Naples, Fla., management consultant, who owned barely $2,000 worth of Yahoo stock, was frustrated that the Internet portal had great potential for growth but "was going nowhere."

So he started a blog questioning Yahoo's leadership team. Then he unleashed "call-to-action" videos on YouTube, a popular online site, decrying Yahoo's poor performance and urging investors to vote against the CEO and six other board members.

Disgruntled investors with stock worth a startling $50 million got onboard, says Jackson, who attended the annual shareholders meeting in June. Chief executive Terry Semel, who'd been criticized for receiving one of the largest compensation packages in corporate America (reportedly worth more than $70 million in 2006) and the board members were reelected, but by relatively narrow margins. One week later, Semel resigned. Observers credited Jackson's online campaign and its outpouring of investor support.

"That was a good outcome," says Jackson, 35. "It's going to be more and more likely that individual investors will follow this path. You can't just say, 'I'm just one person. I only own 96 shares, therefore, who's going to listen to me?' As long as you have an argument to make and you can build a coalition, you can have an effect."

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