Dissident shareholders challenge leadership Investors use clout to force changes


NEW YORK -- Think a company is run by fools? Appalled by their political stands? Believe the top executives pay themselves exorbitantly while exploiting the workers on the bottom? Disgusted by years of anemic results?

Company managements have traditionally maintained a fair degree of immunity to such complaints. Many of the largest companies have long been accused of telling unhappy shareholders to do "the Wall Street walk" -- sell their shares and go away.

Recently, however, major investors interested in financial gains have joined social activists in forcefully using ownership stakes in companies to express their views on management policies. And unlike social activists who have had to content themselves with symbolic victories, these opinions are actually being adopted by shareholder votes.

Peg O'Hara of the Washington-based Investor Responsibility Research Center, said that a record 16 shareholder propositions concerning corporate governance were approved by shareholders last year. This year, only four have passed so far, but a record 44 have been withdrawn after negotiations between major shareholders and companies led to accommodations such as changes in board structure, voting mechanisms and "golden parachutes."

The experience of Baltimore Bancorp's management, which lost control of a third of its board, is unusual but not unique. Ina McGuinness, also of the Research Center, cites the case of Cleveland-Cliffs Inc., an Ohio iron ore company. Although Cleveland-Cliffs has performed well in the past, a major investor disagreed with management about how cash should be used. Management lost five of 12 board seats in a recent proxy vote.

Management also had compiled an enviable record at the computer manufacturer NCR Corp., but a multibillion dollar offer from AT&T; convinced NCR's already well-rewarded shareholders that a change of control was warranted.

A study by Georgeson & Co., the New York-based proxy solicitation firm, concludes that a record 101 proposals on corporate governance were submitted for shareholder consideration this year, up from only 30 four years ago. Between October 1984 and September 1990, the study says that more than 100 contests for control of corporations took place, and challengers won 28 percent of them.

Whether major institutional shareholders should dictate what corporate management should do, or who should be corporate management, is controversial -- and not just among the target companies.

Major institutions, most notably large pension funds, have grown enormously in the past two decades; since 1983, they have dominated trading on the New York Stock Exchange. But their financial presence has not been matched by their voice.

The Maryland State Retirement and Pension Systems, the largest pension fund in the state with $13 billion in assets, is only now debating whether to begin expressing its displeasure about executive compensation at some companies.

"We own the shares voluntarily because we believe they will return dividends and go up in value," said Herbert Dyer, the fund's executive director. "If we didn't believe they would go up, we would sell the stock. That's a whole lot simpler than spending a whole lot of effort on an action that will likely be resisted by management."

Still, Mr. Dyer said, the trustees of the fund have been struck by the increasingly aggressive approach of the California Public Retirement System, the largest public domestic pension fund with $58 billion in assets. This year, Calpers, as the California fund is known, filed a dozen shareholder resolutions targeting management practices at Avon, General Motors Corp., Hercules, ITT, Inland Steel, and Sears, Roebuck and Co., among others.

Calpers contends that it is so large that expressing displeasure by selling out would undermine the market for a stock, as well as the overall market. Moreover, Calpers pursues an investment strategy, called "indexing," that essentially makes it an investor in most of the country's largest companies, regardless of their track record. As a result, getting better results requires "aggressively" exerting "shareholder's ownership rights," it contends.

Even smaller pension funds, like Maryland's, are finding themselves large enough to at least begin wondering whether this is an appropriate way to act. "It hasn't been a concern," said Mr. Dryer, "but as we have grown quickly it has become a concern."

Institutional shareholders' willingness to challenge management began to swell in 1986 when companies began defending themselves from corporate raiders by adopting "poison pills," paying "greenmail" and taking other controversial steps.

But despite the virtual demise in raiding, direct shareholder actions have become more common.

"There is no question about it," said Nell Minow, president of Institutional Shareholder Services Inc., a consulting firm used by institutions. "Shareholders are less patient."

More initiatives are expected. Ms. Minow predicted one likely target is Time-Warner Inc. Headed by Steven Ross, the company -- which has the country's most highly compensated executives -- enraged shareholders twice in the past two years, first by rejecting a $200 a share bid from Paramount, and more recently by proposing a refinancing that prompted a massive stock sell-off.

So far, the efforts by institutions have caused little controversy outside of the boardroom. They have picked their targets carefully, and critical issues, such as confidential voting rights, are too arcane to be understood by the general public.

That could change. One obvious area of conflict is between the institutional money managers, who have a responsibility to get the best returns for their clients, and the other major group that uses shareholder resolutions -- social activists, who seek changes that may reduce corporate profitability.

This type of activity became prominent in the early 1980s, mainly through proposals to limit U.S. corporate involvement in South Africa. It has subsequently spread to encompass corporate actions concerning the environment, baby formula, military sales and charitable contributions, among others.

And perhaps an even broader issue looms. "There is no process or procedure where people whose money is being invested by the largest public pension funds have anything to say about what the pension funds do," said James Kuhn, a professor at Columbia University's Graduate School of Business. "Pension fund managers will now hold corporate managers to account, but to whom are they accountable, and how? That is a question that is only just beginning to be asked."

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