The Enron Corp. debacle, accounting problems, securities analysts' integrity and a falling stock market roused shareholders and accelerated the evolution of shareholder activism and corporate governance reforms.
Although this proxy season hasn't necessary provoked more shareholder resolutions or proxy fights for board seats, shareholder activism grew more aggressive.
"A number of first-time resolutions generated a significant level of support, which is unheard of for a new resolution," said Carol Bowie, managing director-corporate governance services, Investor Responsibility Research Center, Washington.
Notable first-time shareholder resolutions challenged auditor appointments and auditor conflicts following the scandal involving Enron and Arthur Andersen LLP. Many received substantial support, although none got a majority of votes. The highest vote was at PG&E Corp., San Francisco, where 46.5% supported a resolution to eliminate auditor conflicts, according to the IRRC.
"There is a lot more focus on corporate governance (this year)," said Kenneth A. Bertsch, director-corporate governance, Teachers Insurance and Annuity Association- College Retirement Equities Fund, New York. "Shareholder resolutions that have substantive implications are getting a lot more votes."
Enron fallout
"You're seeing a definite impact from the fallout from Enron," said Patrick McGurn, vice president and director-corporate programs, Institutional Shareholder Services Inc., Rockville, Md.
"There is what I call the Enron tan - votes for many shareholder proxy resolutions are up 10 percentage points or better than last year. There is really nothing else to attribute (the rise in votes) to."
"There is a growing number of institutional investors speaking out" on corporate governance, Mr. McGurn said. "And it is beginning to show up on sell-side analysts' reports, where typically they ignored it."
Ms. Bowie said shareholders sent three "loud and clear messages to corporations" in the first post-Enron proxy season:
* Hire more independent directors. The average vote in support for independence resolutions was 29%, up from 22.5% last year.
* Permit votes on executive pay and severance. "Golden parachute" resolutions, for example, received an average of 39.6% of votes, up from 31.8% last year.
* Don't use the company's auditor for consulting work. This first-time resolution received an average of 29.8% of votes in support.
"Before, the independence issue was raised by activists, now you are hearing it from all quarters," said Charles M. Elson, law professor at the University of Delaware, Newark, and director of its Center for Corporate Governance. "That's a sea change."
"On the whole I think it will be a shareholder-friendly year," said Mr. Elson. "This season is colored by the controversies surrounding Enron and Global Crossing." Anxiety about these companies "heightened shareholder awareness on the independence of directors."
"The trend has accelerated concern on these controversies in corporate governance," Mr. Elson added. "Corporate governance has been growing steadily, but support accelerated this year.
Productive season
Robert A.G. Monks, a longtime shareholder activist, crowed about witnessing "the most productive season for corporate governance in the U.S. since I became interested more than 20 years ago."
In Vermont, corporate governance has become an issue in the campaign for state treasurer. Edward Flanagan, who is seeking the office, cited the state pension fund's loss of $4.2 million in Enron. He said he would steer the state's pension fund investments toward companies that demonstrated corporate responsibility. The state treasurer "must join the budding national reform movement, which seeks greater corporate accountability and greater shareholder activism," Mr. Flanagan said in a statement.
Among particular shareholder achievements were:
* For the first time at any company, shareholders at Mentor Graphics Corp., Wilsonville, Ore., voted on a resolution calling for major stock option plans to be submitted to a shareholder vote for approval. The resolution, sponsored by TIAA-CREF, won 56.7% of the shareholder vote. The IRRC's Ms. Bowie called the support "astounding" for such a new resolution, while Mr. Bertsch called it "remarkable."
* At EMC Corp., Hopkinton, Mass., a first-time shareholder resolution on putting more independent directors on the board, sponsored by the Connecticut Retirement Plans and Trust Fund, Hartford, got 56% of the vote. Mr. Bertsch called the support surprising because management generally had been good and the company had good performance until recently. Even the resolution stated, "EMC has a positive record on a number of corporate governance issues." But the vote showed shareholders are less patient, several activists said. The large vote "indicates to me that probably mutual funds are supporting that issue (of independent directors)," Mr. Bertsch added.
* Shareholder resolutions seeking to separate, or limit, auditing from consulting work by the auditor, another first in proxy statements, "got very high votes for first-time shareholder resolutions," said Mr. Bertsch. These resolutions sought, to different degrees, to prohibit or limit corporations' use of one auditing firm for both audit and consulting work. Generally, the auditor independence resolutions got 30% to 40% of the vote, although none received a majority.
Enron apprehension
"That kind of vote support is unheard of" on first-time resolutions, said Mr. Bertsch, who attributed the additional backing to apprehension due to the Enron situation. "There is greater motivation on the part of management to communicate to investors on corporate governance policies, auditor independence (and) increased financial disclosure," such as outside entities involved in financing or shifting revenue to other subsidiaries or companies, he added.
Mr. Bertsch noticed improved communications this year in some conglomerates, such as General Electric Co., Fairfield, Conn., and Tyco International Ltd., Pembroke, Bermuda, which especially is under a lot of pressure over its performance.
"Tyco executives have made themselves very available to investors," he said, speaking just before Tyco's latest round of troubles, which include the resignation of L. Dennis Kozlowski, chairman and chief executive officer.
The vote on the merger of Hewlett-Packard Co. and Compaq Computer Corp. "created a public debate that was mostly pretty constructive," Mr. Bertsch said. "It was a corporate governance phenomenon for a director to take this (dissident) approach," he added, referring to Walter Hewlett. Mr. Hewlett, the son of William Hewlett, co-founder of the company, led a dissident effort to oppose the merger, meeting with institutional investors, a rare undertaking for a director of a company.
"Very seldom is there such opposition to a merger. A lot of mergers haven't worked out that well. There is an increased skepticism on mergers."
"I think Enron served as a warning," Mr. Elson said. "It rattled a lot of people's confidence in the system.
"With a much higher vote on shareholder resolutions," Mr. Elson added, "there is a more willingness by the board to accede to what shareholders are calling for."
