Here Come the Shareholders

2012 is election year, and come November, millions of Americans will head to the polls to make their voices heard in the governing of the country. However, months before November 4, millions of votes will be cast at Annual Shareholders meetings for thousands of corporations nation-wide. Proxy season (as it’s known) has always been an opportunity for shareholder advocates to insert themselves into corporate proceedings and attempt to change the way business is done from the inside out. While shareholders have won a number of major battles in recent years, they are unlikely to rest on their laurels; 2012 is looking to be an extremely busy proxy season for environmental, social, and governance (ESG) focused shareholders. More importantly, the increasing aggression of shareholder activists in this space is to be welcomed and participated in to the extent possible. After all, if you own a single share, you own a part of the company – why not throw your voice into the debate?

An activist investor is a shareholder who uses their equity stake in a given public corporation to put pressure on management to conduct business in a certain way. This pressure can take any of several forms, including proxy battles (battles for shareholder votes on a given corporate resolution at annual meetings), shareholder resolutions, publicity campaigns (for example, Dan Loeb’s use of strongly-worded letters to management), negotiations with management, and, in worst case scenarios, litigation. The popularity of the activist investor approach has soared over the last several decades for a handful of reasons. First, it is a relatively cheap way to impact corporate behavior, especially relative to a full takeover bid – successful campaigns can typically be launched with as little as a 10% equity stake in a given company. Second, companies with active shareholders may outperform those that don’t, making it an attractive strategy for fund managers seeking outsized returns.

Shareholder activism is hardly a new development, though its rising popularity is. Indeed, one of the first companies to issue stock to outside investors, the English (later British) East India Company, had a series of public battles with external shareholders as early as 1622 over potential conflicts of interest between external investors and the existing directors of the firm. These shareholders were largely successful, setting the stage for the next four centuries of shareholder relations amongst a growing group of joint stock companies. These conflicts typically encompassed issues that should be familiar to any follower of corporate affairs today – conflicts of interest amongst management and directors, management appointments, mergers and acquisitions, and executive compensation.

Beginning in the 20th century, shareholders began to turn their attention to issues that were traditionally outside their purview – political, social, and environmental issues that may not have had an obvious impact on the firms’ bottom line, but were clearly related to their core businesses. By 1970, the SEC had ruled that overtly political issues were admissible for shareholder consideration, ushering in an explosion of ESG (environmental, social, and governance) resolutions. In 1988 alone, 111 companies considered 157 resolutions considering over a dozen social issues.

However, shareholder activism, particularly around ESG issues, has really come into its own in the last couple of years. After largely laying low in 2008 and 2009 (largely due to the financial crisis), activist investors began to stir once again in 2010. BY 2011 they were back to peak form. Specifically, 2011 was a banner year for ESG initiatives in particular, making up 40% of all shareholder resolutions filed (404 total), ahead of board-focused resolutions (30%), strategic resolutions (20%), and executive compensation (10%).

What’s more impressive than the high number of ESG resolutions (which were driven by a large number of fracking-related resolutions at nine separate companies) was the support they received. The average level of support for ESG resolutions in 2011 was 22% (of shareholder votes), twice the 2005 figure. Similarly, five ESG proposals received majority shareholder support, the highest number ever. EHS, pollution management, and sustainability reporting resolutions received unprecedented levels of support in the energy industry, including such stalwarts as Tesoro (54.3% support for refinery safety), Chevron (40% for pollution management), and Ameren (53% for handling of coal combustion waste.) These numbers are unprecedented, though they may not tell the whole story. The number of resolutions filed in 2011 probably underestimates the total level of shareholder activism: 45 resolutions were withdrawn prior to the proxy season due to a “substantive dialogue” with or proactive changes on the part of management.

So far, 2012 is shaping up to be equally busy on the activism front. A number of funds are openly limbering up for what could prove to be bruising proxy battles, while others have quietly scored behind-the-scenes victories over major companies before the proxy statements are even mailed. According to a recent report from the Laurel Hill Advisory Group, 2012 is likely to mark the peak of shareholder primacy for the time being, and both sides are gearing up for a bruising proxy season. A given year’s shareholder resolutions provide something of a snapshot of the state of the corporate landscape, and topics such as say-on-pay, director elections, and corporate involvement in the political arena are likely to take primacy this year, though fracking and other ESG issues are likely to remain in the spotlight.

While large investors such as Carl Icahn or CalPERS commonly take the headlines when it comes to activist investing, the field is becoming increasingly democratic. Sites such as,,, and allow small shareholders to find like-minded investors to pool shares (and votes) with in order to push for reform. Additionally, most large mutual and pension funds solicit input on proxy positions from their investors.

This democratization of the field represents excellent opportunities for small, independent, or otherwise non-institutional investors to have a real impact on the proxy season, and by extension, the course of corporate governance for the coming year. The personal implications of this should be obvious. If you own a share in a mutual fund, you own a share of that fund’s vote at a given company’s annual meeting. If you don’t like the way things are done at that company, then get involved. Just as the only way to have a say in American politics is to vote in an election, the only way to have an impact on corporate governance (unless you are already an officer or director) is to exercise your rights as a shareholder. As a shareholder, you own a part of the company, and you are entitled to your say in its governance. Make your voice heard.