Some big-block investors fight company efforts to foil takeovers
A Jesuit priest steps to the microphone and labels American Electric Power Company ``the largest corporate contributor to acid rain in America.'' Management bristles a bit as several other shareholders voice support for a resolution that asks for special reports on company efforts to cut sulfur-dioxide emissions.
A vote is taken. Management sweeps aside the opposition by garnering 93 percent of the ballots. This is shareholder democracy.
Similar confrontations (with similarly one-sided outcomes) take place almost daily during March, April, and May, when most companies hold their annual meetings.
But the disparaged corporate raiders are shaking up this forum.
Time and again, T. Boone Pickens Jr. (among others) has used the voting rights of shareholders to challenge management, as he is doing now with Unocal Corporation. The reaction from management far and wide has been to try to limit the powers of shareholders.
As a result, a sleeping shareholder giant has been stirred. The once-quiescent institutional investors are becoming a formidable force for management to reckon with.
In theory, shareholders own and control the company. Company directors are hired to oversee the business for the shareholders. But in giving management the power to operate, shareholders often give up much of their control. True, shareholders can band together to oppose management. Each share of common stock provides that stockholder with one vote. But many stockholders either do not mail in their ballots (which often means an automatic vote for management) or blithely support management, so long as the dividend checks keep arriving and the stock price rises.
In the past, institutions (pension funds, bank trust funds, insurance companies, universities) passively voted with management. They followed the old ``Wall Street rule'': If you don't like what management does, sell the stock.
But that's getting to be a difficult rule to follow. Takeover fears prompted at least 200 companies to include anti-takeover proposals in their 1984 proxy statements, according to a survey by Investor Responsibility Research Center (IRRC). This year the pace appears to be continuing unabated. The response of more and more institutional holders is to exercise their voting rights against measures seen as entrenching management.
``Managements' defensive tactics, and particularly some of the `greenmail' episodes last year, did a lot to activate the institutional investors -- especially the public pension funds,'' says James E. Heard, deputy director of the IRRC.
And in the rush to protect themselves, there is concern that management is riding roughshod over shareholders.
``Many institutions feel overlooked or taken advantage of. They feel management is disregarding or trampling on shareholders' rights. And now they see they have options other than selling their stock,'' Mr. Heard says.
Take Manning & Napier Advisers in Rochester, N.Y. The firm manages some $1.3 billion in funds, and it decided to take a stand.
This year, Bausch & Lomb management proposed to stagger the election of board members -- a tactic used to prevent takeover artists from taking control.
Manning & Napier is the largest shareholder of the optical concern. It objected to the proxy proposal. B&L had already adopted one anti-takeover measure. ``We felt this was unnecessary,'' says analyst Reuben Auspitz. ``Its primary effect is to transfer rights away from shareholders.''
The proposal would lock in directors for two years, ``whether or not a change in the board would be beneficial to the company and its shareholders,'' the proxy read.
The investment firm made a few phone calls to some other B&L shareholders and found that many other institutions had reached the same conclusion. The proposal passed -- but just barely. Management received 50.8 percent of the votes.
``We're quite disturbed about the trend we're seeing among target companies to protect themselves -- without due consideration of shareholders' rights,'' Mr. Auspitz says. ``We understand management's prerogatives to run a business -- we're inclined to vote with management on many issues, they're closer to operations. But that's not the issue. The issue is diminution of shareholders' rights.''
The real villain among takeover measures is the ``poison pill,'' according to Harvard professor Michael Jensen. ``In various forms, these allow the board of directors to change the basic rules of governance of a corporation, and in a way that doesn't require shareholder approval.''
Mr. Jensen says Household International's poison-pill plan, upheld by a lower court, is particularly blatant. The Securities and Exchange Commission and the Investment Company Institute, a mutual fund trade group, have filed briefs supporting a Delaware Supreme Court appeal of the decision.
Household's poison pill -- a complex arrangement making the company prohibitively expensive to buy -- would be triggered if any shareholder bought 20 percent of the stock or announced a tender offer for 30 percent of Household stock.
``I personally find what's going on incredible,'' Jensen says. ``If the courts continue to rule this way -- which fundamentally changes shareholders' rights -- the only answer for shareholders is to rewrite the charter.'' He advises anyone starting a corporation to consider anti-takeover provisions when drawing up the charter.
Another sign of the growing opposition: the Council of Institutional Investors, formed this year by 22 public pension funds. The purpose is not to ``gang up on management'' or to promote social issues, says co-chairman John Konrad, who is also chairman of the Wisconsin State Board of Investments. He says it is to share ideas, perhaps prepare guidelines, on how to react to anti-takeover measures.
Institutions are not championing shareholders' rights for the purely altruistic purpose of preserving shareholder democracy. Institutional investors have found themselves too often on the short end of greenmail payoffs. Also, the value of their investment may drop if an anti-takeover measure eliminates the possibility of a new, more energetic management taking charge, points out Yakov Amihud, a finance professor at New York University.
Mr. Amihud also says all anti-takeover resolutions are not necessarily bad for shareholders, because if an attempt takes place, a little takeover resistance will give management time to put together a better offer. But he notes that too much resistance will discourage investors.
Finally, while some managers are irked enough to become activists, others feel that it is simply not their job to cross swords with management. Their position is essentially: ``We're money managers, not corporate managers. We are hired for our ability to obtain investment results, not to protect shareholders' rights or meddle in corporate business.''
Says Walter Bean at First Chicago Investment Advisers: ``We vote with management, and if we can't reconcile management policy, then we sell the stock. We try not to get into a position of many meetings with management to debate corporate policy. We feel that time can be better used to increase the performance of our client's investment.''
But one money manager, who asked for anonymity, says fiduciaries are sworn and ethically bound to protect shareholders' rights. The law is unclear, but he expects a fund manager to be sued one day for not voting against management-entrenching anti-takeover provisions. Institutional holders speaking out on ethics
Institutional investors are becoming more active participants in the arena of ethical issues.
Typically, resolutions questioning the ethics of management decisions capture only a small percentage of shareholder votes. The issues tend to revolve around involvement in South Africa, production of nuclear and space weapons, pollution, and human rights.
This year, ``We're getting incredibly high votes,'' says Timothy Smith, director of the Interfaith Center on Corporate Responsibility. ``We've more resolutions capturing over 10 percent of the vote than ever before.''
His New York-based organization coordinates the proxy votes tied to $10 billion in stock held by 17 Protestant groups and more than 200 Roman Catholic orders and dioceses.
The higher percentages of votes are coming despite rules changes made by the Securities and Exchange Commission last year which have cut down on the number of resolutions that get reintroduced at annual meetings. (The ICCR is challenging this rule change in court.)
Mr. Smith believes the surge in voting support has come in part from wider institutional participation. For instance, the New York City public pension fund sponsored 20 shareholder resolutions on South Africa.
Such institutional support adds a degree of urgency to the resolutions, says Smith. Management is less likely to brush off the vote as a minor irritant.
To date, most of the impetus on South Africa has come from state and local retirement, church, and university funds. Six states and 26 cities have passed legislation requiring reinvestment of pension funds.
But how far institutional participation extends beyond South Africa to other ethical concerns is unclear. According to the National Investor Relations Institute, interest in social issues remains low among institutional investors.