In line with the growing popularity of shareholder activism, this year’s proxy season has seen investors demand complex reforms and institutional changes to corporate governance. Historically, the practice of proxy voting has been a glorified form of box ticking, but the process has been invigorated by rising shareholder expectations. This year’s season has illustrated that no company is exempt from shareholder pressure, no matter the actual quality of corporate governance or assuredness of promises about financial performance.
The voting process allows investors in public companies an opportunity to voice their discontent and offer solutions to what they consider corporate shortfalls. Vice President of NYSE Euronext’s Corporate Actions & Market Watch team, Judith McLevey, said: “Similar to last year, shareholders have sought continued governance changes, with the declassification of the board, majority voting, the right to call special meetings and/or act by written consent being the most frequent governance-related proposals we’ve seen on this year’s proxies.”
The tragic kingdom
Last year, the US’ second most natural gas producer Chesapeake Energy last year suffered at the hands of shareholder discontent, as the company was forcibly made to introduce a raft of corporate governance reforms and to persuade chairman Aubrey McClendon to step down in April. Likewise, Citigroup last year implemented a procession of complex governance reforms in curbing any future cases of shareholder activism, following Vikram Pandit’s early exit at the hands of widespread discontent with his remuneration. Perhaps most indicative of the changes to proxy voting is Disney.
The tenure of former chairman and chief executive Michael Eisner was cut short in 2005 after his behaviour – in the words of William Chandler of the Delaware Court of Chancery – fell “far short of what shareholders expect and demand from those entrusted with fiduciary position”.
While Eisner’s exit resulted from ailing company health, recent reforms to the enterprise have come amid a fruitful financial period. Disney’s chief executive, Bob Iger, last year led the company’s shares to an all-time high. However, at the firm’s annual meeting on March 6, shareholders labelled Disney a “tragic kingdom” and penalised Iger by splitting his role to include a chairman and chief executive position.
The company’s unusual predicament is illustrative of today’s heightened shareholder expectations – not only in terms of profit but also in terms of corporate governance standards. Profitability is no longer the single gauge of success: it is one of many considerations when determining shareholder value.
Critics of activist shareholders claim their intentions are motivated not by short-term financial gains but by more dubious goals. A recent report by the Proxy Monitor at the Manhattan Institute revealed 36 percent of shareholder resolutions in 2011-12 were put forward by trade union pension funds, whereas 22 percent were “socially responsible” funds – those with a religious or public policy goal.
However, despite a number of suspected ulterior motives, without a majority, voting reforms are unlikely to be passed. This explains the vast proportion of motions being mainstream corporate governance reforms – which are likely to yield greater profits and create greater shareholder value.
Regardless of profitability, the failure of a company to engage with shareholders could be interpreted as impenetrability, leading those affected to resort to activism as the only means of engagement. For companies to reassure shareholders of their place at the centre of an organisation, they must ensure the utmost degrees of profitability and transparency in all their dealings.