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A record year for shareholder activism

By G. Jeffrey MacDonaldCorrespondent of The Christian Science Monitor / June 28, 2004

Question: What single force can get Tyco International to strive for cleaner emissions, inspire PepsiCo to study the impact of AIDS in developing nations, and even get Merck & Co. to declare its intentions to not manufacture an abortion pill?

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Answer: shareholders.

Motivated to be heard in the post-Enron age, shareholders are flexing their muscles, demanding responsible policies and practices in unprecedented ways. And though some still feel like second-class citizens behind executive elites, shareholder activists are reporting new receptivity to their causes - thanks, they say, to a scandal-charged atmosphere that has management humbled and listening.

"The embarrassment of the scandals is leading companies to talk," says Daniel Rosan, director of public health for the long-time shareholder activist network, Interfaith Center on Corporate Responsibility. "Savvy companies have realized that shareholder concerns are a kind of feedback they need."

The chief barometers of shareholder activism indicate the movement has reached new heights since the wave of corporate scandals began in 2002. In that year, shareholders brought 802 proposals to a vote at company annual meetings, according to tracking data from the Investor Responsibility Research Center. In 2003, that number jumped to 1,082. So far this year, a record 1,147 proposals have been made as the five-month proxy season winds down this month.

What's more, shareholder proposals - once regarded as voices crying in the wilderness - are now receiving more votes. A record 161 proposals won majority support from shareholders in 2003. That record could be broken this year.

What shareholders want ranges from limits on chief executive officer pay (the most common proposal) to nondiscrimination policies that include sexual orientation. Although they are nonbinding, resolutions commonly work by bringing unwelcome public attention or even shame upon a corporation.

Beyond resolutions, however, lies an array of other tools in the shareholder activist's toolbox. And what activists find most inspiring about the current climate is the potential for influencing corporate policy without going the resolution route.

"I don't like to use shareholder proposals because you're starting out in a combative position," says Frank Rauscher, president of Aquinas Funds, a mutual fund for advancing Roman Catholic social causes. "We've been very successful, especially in the past few years, through dialogue alone." For example, the fund company sent a letter to Merck & Co. management outlining the liabilities potentially associated with the manufacture of the RU-486 "day after" abortion pill. That was all it took to obtain a statement that the company would not manufacture it, Mr. Rauscher says.

Since shareholders own portions of public companies, each has a right to vote on nominations for boards of directors and other proposals presented at annual meeting. Proxy forms sent in the mail enable shareholders to vote without attending in person. What's more, anyone who owns $2,000 or more in stock can, according to the Securities and Exchange Commission, draft and present a proposal for consideration by all shareholders.

In general, proposals aimed at social or corporate governance issues come from attorneys or specialized firms hired by major institutional investors, such as universities, unions, or state pension funds. But individual investors are making their voices heard as well by teaming up with coalitions of like-minded investors and using collective clout to advance their agendas.