Shareholder activism has intensified in recent years. According to Michael Reilly, a 24-year veteran of Reuters Group and internet communication specialist, “activists come in many shapes and forms. In addition to high-profile funds, there are shareowner groups such as unions, pension fund managers and a variety of money and asset managers.”
Regulators have stepped up their demands for greater governance reform and transparency. This means that they are putting pressure on companies to perform to higher standards than ever before. This is a plus for investors, but it also has the effect of encouraging both institutional investors and hedge fund activists to be bolder.
Under the Dodd-Frank Act passed by Congress last year, companies are now required to hold a ‘say on pay’ vote and a ‘say when’ frequency vote. At 2011 annual meetings, shareholder proposals were down 25%, there were fewer executive compensation proposals, and the number of directors failing to receive majority vote also decreased. There was renewed interest in majority voting for election of directors, and support for board declassification averaged 73.5%. Shareholders are speaking out.
Compensation has been the subject of many shareholder proposals. It is not just about pay for performance but also about clawback provisions. ‘Clawback’ refers to building terms into compensation agreements that require money to be paid back if performance targets are not met. Shareowners are starting to ask for more detail and are demanding to have a voice on how executives are being compensated.
Adding to these issues, Pro Bono undertakings and a new type of proponent, law school clinics, are causing concern for some public companies. The Shareholder Rights Project (SRP), a newly established clinical program at Harvard Law School, will provide students with the opportunity to obtain hands-on experience with shareholder rights work by assisting public pension funds in improving governance arrangements at publicly traded firms. Students may also have the opportunity to be involved in policy work relating to shareholder rights issues. Some public companies fear that this could open them up to more activist issues.
Shareholder activism – good for companies or bad for business?