Thursday, March 13, 2008

Compliance Week: The Rise of Online Shareholder Activism

By Jaclyn Jaeger — March 11, 2008

Shareholder activists have always been a thorn in the side of companies. Today, however, thanks to the Internet, they are a sharper and more potent thorn than ever before.

What particularly pangs companies is the casual manner in which some of these activists have been able to gain recognition toward their causes; online tools, such as e-mail, blogs, video Websites, and electronic shareholder forums have all made activist campaigns much more well-organized and visible forces to be reckoned with.

Just ask shareholder activist Eric Jackson. In less than 12 months, he has managed to oust the chief executive officers of both Yahoo and Motorola with a few thousand dollars and series of well-timed mouse clicks.

In the case of Motorola, Jackson says, good timing and media attention really helped promote his cause. Only two days after his “Plan B” campaign was launched, which included getting rid of CEO Ed Zander, the $43 billion company announced a poor quarter. The stock dropped, “and that got the media’s attention for the changes we were advocating,” he says.

Also helpful was the support among the Motorola community that the campaign generated. “We had a lot of internal Motorola employees, as well as ex-employees, who supported our group and culture changes, because they were concerned that the company wasn’t moving in the right direction,” Jackson says.

In November, five months after Jackson began his campaign, Zander stepped down, “which is roughly the same timing as what happened at Yahoo,” he says. “However, the company still has a lot of problems. They haven’t moved quickly enough on all fronts that we had suggested to really address them. I think it will take a couple of years to really turn that company around.”

Jackson adds: “What that campaign … showed me is that a lot of companies are poorly run and, therefore, could be targets for an activist campaign.” To further promote his cause, Jackson in February launched his own investment activist firm, Ironfire Capital. “So I’m now going to be heading these campaigns more and more frequently.”

SEC Weighs In

That sort of pronouncement from Jackson won’t thrill many companies. And it gets worse: Ever-more activists are following Jackson and using the Internet to state their case. And in a perfect example of “if you can’t beat ‘em, join ‘em,” the Securities and Exchange Commission has adopted final amendments to federal proxy rules to encourage the creation of, and participation in, company-sponsored electronic shareholder forums.

The amendments, which went into effect Feb. 25, are “intended to tap the potential of technology to help shareholders communicate with one another and express their concerns to companies in ways that could be more effective and less expensive,” SEC Chairman Christopher Cox remarked at the Commission’s Nov. 28 meeting.

The amendments clarify a few housekeeping details, such as when a comment on a company-sponsored forum would constitute a solicitation subject to proxy rules, and whether forum operators could be held liable under federal securities law for any statements participants in the forum make. (Generally speaking, the answer will now be “rarely” for both concerns.)

Overall, the majority of comment letters received by the SEC expressed favor toward such electronic shareholder forums. “We believe that a system that can facilitate increased dialogue between investors and a company’s management helps to build investor confidence through increased understanding of the company’s policies and operations and management’s awareness of shareholder concerns,” Martha Carter of RiskMetrics Group wrote in one letter.

Carter went on to say that RiskMetrics opposed substituting such forums for the current means of presenting non-binding shareholder proposals in the company’s proxy statement. “While electronic forums are useful as a supplement to the current shareholder proposal process, they are not a replacement for procedures that have successfully been in place for decades,” she wrote. “Part of the value in allowing shareholders to vote on non-binding shareholder proposals is in the information that the proposals and, more importantly, the vote results convey to the company.”

Several other comment letters expressed similar concerns. As noted in a comment letter from the California Public Employee Retirement System, General Counsel Peter Mixon wrote: “CalPERS believes that non-binding shareowner proposals are too important to the corporate and shareowner community to be replaced with an unproven chat-room concept.”

Another comment letter by the Calvert Group, a $15 billion socially responsible investment fund, noted that electronic forums would not adequately replace the focus and structure that current advisory resolution processes allow, especially given that “an electronic chat room is an idea with a number of unanswered questions.”

The letter continued: “It is difficult to imagine a Web-based chat room providing a focused discussion or debate on an issue of importance. Such a forum would likely lead to unmanaged discussions that provide little guidance to corporate management or a board in regard to shareholder sentiment.”

In response, the final rule spells out that electronic shareholder forums are an additional, rather than a substitute, means of shareholder communication.

Glorified Chat Rooms

Many companies also worry that company-sponsored electronic shareholder forums will be nothing more than what is seen on a Yahoo Finance message board, where shareholders just complain and use the chat room as an opportunity to take potshots at management and the board, Jackson says. “Obviously, that would be a lost opportunity if that’s all that they were,” he adds.

Jackson says he hopes such forums will raise “real concerns and questions” that generate positive responses from management over investor concerns. “That hasn’t really happened yet. I hope there are some early success stories that will inspire other companies to follow suit.”

Jackson likens companies’ fears of electronic shareholder forums to the advent of blogs. “When blogs first appeared I think a lot of companies were worried that they couldn’t control the message and that you would have a lot of people getting on blogs and criticizing the company, and they didn’t want that to happen,” he says.

On the other hand, he says, companies that did embrace blogs—even the ones that were criticized—eventually gained a lot of credibility in the eyes of the users, because the blogs ended up leading to useful dialogue. “I think the same could happen here,” he says.

That doesn’t mean that companies should give in to every shareholder demand. “Just because you’re a shareholder doesn’t mean you have the right idea of how a company should be run,” he says. “I think companies are smart to be critical of the ideas that are brought forward to it” but still remain open-minded to ideas that have value.

That open-mindedness will be particularly beneficial as online shareholder activism continues to grow. In fact, Jackson predicts that future online forums will include not only questions and answers among companies and shareholders, but also include features like campaign-style political ads on sites like YouTube in relation to upcoming shareholder votes.

“It’s going to be exciting. I think there is going to be much more interactivity between shareholders, in general, but especially individual shareholders and larger companies that people certainly would not have thought possible five years ago,” he says. “I’m going to be interested to see—and I know the SEC will be, too—just how successful these early adopters are.”

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