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The recent wave of corporate scandals has spurred Congress, federal and state prosecutors and even the courts into taking action, championing the cause of defrauded investors left holding the bag. Now it is the investors themselves who are taking charge. Their weapon of choice is the shareholder or proxy proposal, and they are wielding it in record numbers. So far this year, more than half of the nation’s 2,000 largest public companies have been hit with shareholder resolutions, according to the Investor Responsibility Research Center (IRRC), an independent Washington, D.C.-based research firm. The 1,082 proposals filed in 2003 is more than a third higher than the 800 or so filed the previous year. About three-quarters of the resolutions filed this year concern corporate governance; the rest deal with social and environmental issues. Even more dramatic is a three-fold increase in proposals attacking executive compensation: some 324 so far this year, up from just 106 the previous year. “Investors see these rotten portfolio statements coming in and at the same time executive pay packages that are simply out of control,” said Michelle Soule, director of marketing at IRRC. “They’re saying it’s got to stop.” In addition to issues of executive compensation, other popular proposals include splitting the offices of CEO and chairman and getting off-shore companies to reincorporate in the United States, said Todd E. Mason, a partner at Mintz, Levin Cohn, Ferris, Glovsky and Popeo. Corporate governance experts said they were not at all surprised by the increase in stockholder proposals, given the focus on governance in the post-Enron era. Mason also pointed out that technology has facilitated stockholder activism. For instance, he said that many big corporations now allow stockholders to cast their votes online. Investors have also passed a record number of resolutions: more than 125 as of the end of last month, with the total for the year expected to reach 150, or 50 percent more than in 2002, itself a record year. Leading the effort are public and union pension funds and other powerful institutional investors. Individual shareholders have a much tougher time getting proposals into proxy statements because of the “very technical and complicated rules” governing them, said Stephen J. Gulotta Jr., a partner at Mintz Levin. This year already, shareholders have won initiatives to limit executive severance packages at Verizon Communications Inc., Sprint Corp. and GlaxoSmithKline Plc; to expense stock options at Apple Computer Inc., Eastman Kodak Co. and J.C. Penney Co. Inc.; to hold annual elections of boards of directors at Avon Co. Inc., The Boeing Co. and Weyerhaeuser Co.; and to oppose the anti-takeover provisions known as poison pills at Yahoo Inc., Delphi Corp. and Southwest Airlines Co. And each time they did so over management’s opposition. At the end of the day, the impact of this record wave of investor activism may be limited because shareholder resolutions are not binding. Companies have to consider them but not necessarily enact them. The rules are intended to protect companies from hostile takeovers, but they also allow them to ward off unwanted proposals for corporate governance reform. At Apple, for instance, 56 percent of shareholders approved a proposal to expense stock options. At first, Apple’s board said they would adopt the proposal, but a week later they reneged. In fact, among the dozens of companies hit with a proxy resolution to curtail executive pay packages, not a single one has adopted it, according to IRRC’s Soule. Still, experts say that a shareholder resolution can and often does put pressure on the targeted company. “Even a non-binding resolution that receives strong support has to be considered very seriously, particularly in today’s environment,” said Mintz Levin’s Gulotta. For example, the New York-based Teachers Insurance and Annuity Association-College Retirement Equities Fund (TIAA-CREF), an enormous pension fund with $262 billion in assets, reported that it wrote to some 25 companies earlier this year raising a variety of concerns regarding corporate governance and executive pay. About 15 agreed to adopt the suggested changes. TIAA-CREF then filed shareholder proposals against the remaining 10. Most of these companies agreed to changes, leaving just two proposals — at Siebel Systems Inc. and SBC Communications Inc. — on the table. The Calvert Group, a Bethesda, Md.-based socially responsible investment firm, has had similar success this year with its proxy proposals. The firm reported that out of the 20 resolutions it filed this year, seven were withdrawn after the companies agreed to make the changes. Schering-Plough Corp., for example, agreed to increase the number of independent directors on its board in response to a Calvert-sponsored proposal. The strategy works because companies would prefer to avoid an embarrassing showdown with their shareholders. As IRRC’s Soule explained, in the event a proxy resolution passes against the wishes of the company, the board is forced to defend a position directly opposed to what the shareholders want. As the proxy season draws to a close, shareholder activists are turning their attention to the ultimate prize — the right to nominate their own candidates to the board of directors, a power they lack under the current federal regime. Securities and Exchange Commission Chairman William Donaldson announced this spring that the agency planned to conduct “a thorough review of the proxy rules and regulations to ensure that they are serving the best interests of today’s investors.” The SEC is gathering public comments and has asked its staff to issue an internal report and recommendations by July 15. Investor groups hailed the move, which, should it come to pass, is likely to face heavy opposition from industry. Already the Business Roundtable, a powerful business lobbying group, plans to ask the SEC to defer any changes to the rules until after new standards on corporate governance by the New York Stock Exchange and Nasdaq are in place. Experts said that, in any event, such a radical change is a long way off. “There are scores of issues lurking here that will require quite some time to parse through,” said Mintz Levin’s Gulotta.

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