When 43 percent of stockholders withheld their votes Wednesday in Michael Eisner's uncontested bid to remain at the helm of Walt Disney Co., they sent a no-confidence message that will resound in boardrooms far beyond the one that runs Mickey's realm.
Shareholders - especially big institutional ones who manage other people's money - are mad. And with the new proxy season now under way, they appear set to act on their anger, experts say.
"You'll see this in other companies," says Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. "The day of easy shareholder approval of a company that's had governance and performance issues is really over, and I think boards need to be mindful of that."
Signs of the latent power of shareholders can be seen in leadership changes that came in advance of the season of shareholder meetings, which roughly runs from March through May.
Philip Watts, head of Royal Dutch Shell, resigned Wednesday. Shareholders have been simmering since January about Shell's downward revising of its stated oil and gas reserves. Last month's announcment by Douglas Daft, Coca-Cola's chief, that he would retire at year's end came amid federal scrutiny following charges by former executives that the company overshipped ingredients to bottlers to pump up financial results. Four years ago, a shareholder lawsuit reportedly made similar charges.
After the Disney vote, the company's board met a key demand of the protesters by stripping Mr. Eisner of his chairman's position, but handed it to his close ally, George Mitchell. Eisner remains Disney's chief executive officer.
While shareholder revolts almost never win majority support, they can attract enough attention to change corporate behavior. "It's a blunt instrument to send a message," says Gerald Davis, professor of organizational behavior at the University of Michigan. But "I think we're seeing the fruition of some long-term trends."
A confluence of events from corporate scandals and mismanagement to rule changes is pushing mutual funds, insurance companies, and pension funds to take a more activist approach in voting their shares. Experts call it a new era of accountability.
"I think there's no question that what's happened over the past three years or so has shortened the fuse for institutions," says Beth Young, a lawyer and research associate at The Corporate Library, an independent online source of corporate governance information. "There used to be a sentiment that you give people a fair amount of latitude, you give CEOs and boards a lot of time.... There's a sense now that that attitude really allowed mismanagement and corruption and wrongdoing to flourish."
Professor Davis points to developments over the past 15 years or so that he says have made it much easier for institutional investors - and small ones, voting their proxies - to wield real influence over the way boards do their work. In 1992, he says, rule changes at the Securities and Exchange Commission allowed investors to communicate with each other about voting.
"This is amazing, but prior to October 1992, if five or more investors of any size - even five people at a dinner party - communicated about how they were going to vote, it violated the proxy rules," he says. "They had to actually register their communications with the SEC."
He also points to the rising clout of Institutional Shareholder Services (ISS), a private firm that analyzes proxies and advises large investors. ISS has become indispensable, Davis says.
"Fidelity must own 2,500 different equities, and it pays to have a 'subcontractor' like ISS come to reasoned judgments about how best to vote on these things," he says. "A lot of institutions will essentially vote how ISS tells them to. They were a really key player in the Hewlett-Packard/Compaq merger."
ISS didn't mince words in recommending withholding votes from Eisner's reelection (but supporting the reelection of the other three board members under shareholder scrutiny). "At the end of the day, all roads lead back to Eisner," the ISS said.
In an interview with ABC's "Nightline" Wednesday, Eisner acknowledged the vote against him: "We should have been considering, and getting our company into contemporary governance and we did it today.... And there are obviously certain people that are not happy with me personally, I guess."
Recent corporate scandals have also played a huge role. "We saw a jump in the number of shareholder proposals in the 2003 proxy season both on governance and corporate-responsibility issues," says Suzanne Fallender, vice president of the social-investment research service at ISS in Rockville, Md.
Shareholder proposals - submitted by a shareholder who meets minimum-holdings and time-of-holdings requirements - are featured on the agendas at annual meetings. They are often viewed as a barometer of shareholder sentiment. In 2003, 324 proposals regarding executive compensation were report- edly put forth - a threefold jump from the previous year.
Ms. Fallender says the ISS has noted "an important trend" toward shareholder-corporate dialogue heading into this proxy season: A fair number of proposals have not gone to vote at those meetings because firms have agreed to make premeeting changes. Last month's agreement by American Electric Power and Cinergy Corp. to assess plant emissions led to the withdrawal of shareholder resolutions on the issue. But whether corporate concessions will be enough for angry investors is unclear.