Related Resources Read the comments about security holder director nominations Check the SECs proposal on shareholder director nominations Jubak's Journal Recent articles: • 5 stocks to retire on -- and count on, 3/5/2004 • A recovery built on retirees' backs, 3/2/2004 • 5 stocks for the skeptical tech investor, 2/27/2004 More... | Jubak's Journal Why are shareholders so powerless? Investors staged a stunning protest at Disney's annual meeting -- and changed virtually nothing. In fact, their hollow victory could help kill any reform. By Jim Jubak In any self-respecting dictatorship, a head of state who got a no vote from 43% of the electorate while running unopposed would be on the next plane to Switzerland with all the cash that could be crammed into a suitcase. But corporate democracy doesnt work like that. About 43% of Walt Disney The sop thats thrown to dissenting investors? The board decided to separate the chairman and chief executive roles, giving the new job of non-executive chairman to director (and former senator) George Mitchell, who himself received no votes from 24% of shareholders. In splitting the two jobs, says Eisner, we heard our shareholders. Shareholder rights. What an oxymoron.
If youre not already outraged by the farce at the March 3 Disney annual meeting in Philadelphia, stew on this: The success that dissident shareholders had in getting 43% of shareholders to withhold their votes from Eisner could well kill even the limited corporate voting reforms now under consideration at the Securities and Exchange Commission. Corporations were already lobbying hard to kill the almost toothless rule-change proposal; theyre now likely to lobby even harder. Far from trivial As the amount of heat that even the proposed rule change demonstrates, this isnt a battle over trivial details. Without meaningful changes in the way that corporate elections are run, all the reforms passed so far in an attempt to control executive greed, prevent financial mismanagement and protect investors from financial fraud are likely to fail. The only way to keep the rascals honest is to give shareholders real power to throw them out. Thats exactly what we dont have at the moment. Why are investors so powerless? We can use the results of the Disney shareholder revolt to explain. Lets start with this: Almost all nominations for a companys board come from the board's nominating committee. Investors have no say except in the unusual case when an institutional shareholder with a huge stake in the company demands a board seat or else. ("Or else" usually means that the investor will attempt to take over the company.) Since most directors dont have any interest in nominating anyone to oppose them (and certainly not a strong candidate), the boards slate of candidates usually consists of board members seeking re-election and a few carefully vetted newcomers to fill any empty board seats. More Martha Stewart news and commentary on MSN Money And if a shareholder or group of shareholders wants to propose a candidate for election to the board? Why, theres absolutely nothing to stop the effort -- except money. Gobs and gobs of money. Footing the expense Under current SEC rules, companies don't have to include the names of candidates not nominated by the board in the official proxy materials mailed out at company expense. Non-board nominees have to foot the expense of preparing the materials and mailing them. Thats a considerable expense for anyone who wants to nominate a candidate to the board at a company such as Disney. Disney has 2.05 billion shares outstanding. About 35% of those shares are held by individual investors in millions of individual accounts. Even the institutional ownership, the other 65%, is scattered. The top institutional owner of Disney shares, Barclays Global Investors International, owns just 3.5% of all Disney shares, and the top 15 institutional investors hold just over 28% of shares. Consequently, most board nominees go unchallenged; the few who are challenged almost never face more than token opposition. Instead of challenging the system, most investors either sell their shares when the board and the CEO get out of control or ignore the issue entirely until it blows up. Even when dissatisfied shareholders come together in a campaign to withhold votes from one or more directors, its considered a success -- and extremely embarrassing to the targeted director -- to have even 5% of votes withheld. In that context, the Disney vote is absolutely shocking. Besides the 43% of votes withheld from Eisner and the 24% from Mitchell, other directors received substantial "no" votes:
** Disney president and chief operating officer Holding on Of course, while they might have been embarrassed by the voting, they held onto their board seats. How would the new rules proposed by the SEC change this? They set up two triggering events:
(Reading the second trigger might set you wondering. Why, if a majority of shares vote for something, in this case access to the proxy, does it require a new SEC rule to force the company to comply with the vote? Thats because now all such votes on shareholder resolutions are purely advisory. The company is legally free to ignore them no matter how many votes they get. But thats another story.) These triggers in the SEC proposal only put the opposition candidate on the ballot. Theres still the problem of recruiting someone of enough stature to win the vote. The SECs rule would make that a tough job. Any outside candidate for the board would have to be independent, by the agencys definition, both of the company and of the group supporting the candidate. I think this rule is nearly toothless: Its another example of the kind of bone that Washington regulators routinely throw to investors outraged by the recent string of financial scandals and CEO frauds. Changing a board's character? Consider that 35% hurdle. According to the SECs own records, in the last two years, only about 1% of companies have witnessed withheld votes of 35% or more. Remember that it takes another year before that triggering withheld vote leads to outside nominees on the ballot. There's also a big difference between electing a director or two and changing the character and direction of a board, especially if directors serve staggered terms so that only a fraction of members are elected in any one year. (You can look at the proposed regulation Security Holder Director Nominations on the SEC Web site.) But the relative modesty of this reform hasnt stopped it from becoming the most controversial proposal in SEC history. The agency received more than 13,000 comments on the new rules by the Dec. 22 cutoff for comment, more than it has ever received on a proposed regulation. And that was before the Disney vote emphasized that dissident shareholders could actually set off the 35% trigger even at a huge established blue-chip company. Many comments urged the SEC to strengthen this rule so that shareholders could actually elect people who represented their interests to the boards of the companies they theoretically own. But you certainly shouldnt be surprised to hear that much of the corporate world is vehemently opposed to even this change. Here are some comments from the SECs files opposing this proposal.
The next round in this battle is set for Wednesday, when the agency holds what it calls a roundtable on the proposed rules. Changes to Jubaks Picks Sell Paychex In my March 2 update on Paychex With job growth continuing at a puzzlingly slow pace for this point in a recovery and interest rates likely to stay low, I think investors cant count on a strong performance over the next six to eight months from Paychex. The trends that I was counting on to lift these shares when I added them to Jubaks Picks last fall just havent materialized. With the stock dead money at best, in my opinion, Im going to take my loss here and look for a better opportunity. I have a 10% loss in these shares since I added them to Jubaks Picks at $36.92 on Oct. 7, 2003. (Full disclosure: I will be selling my personal position in Paychex three days after this column is posted.) New developments on past columns Why this recovery feels so painful The February jobs numbers are in, and they dont look good. Nonfarm payrolls rose only 21,000 as companies remained reluctant to hire. The unemployment rate held steady at 5.6%, but the employment/population ratio, the percentage of the population 16 or older with jobs, fell to 62.2%, its level for most of 2003. The workweek remained unchanged at 33.8 hours, and wages grew at a slow 0.2%. Year-over-year weekly earnings are up just 1.9%. Theres certainly no inflation in these numbers, and they push any potential interest rate hike by the Federal Reserve even further out into 2004. But theres nothing here to make consumers feel better about spending or investors more confident that this recovery has become self-sustaining. Editor's Note: A new Jubaks Journal is posted every Tuesday and Friday. E-mail Jim Jubak at jjmail@microsoft.com. At the time of publication, Jim Jubak owned or controlled shares in the following equities mentioned in this column: Paychex and Pfizer. He does not own short positions in any stock mentioned in this column. | ||||||||||||||||||||||||||||||||||||||||||
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