Shareholders and Shareholder Activism

CHAPTER 7

What is a shareholder activism? Is when shareholders express

their opinions to try to affect or influence the firm.

Types of Shareholder Activist? 1. Shareholder proposals 2. Directors election contest 3. The lawsuit

Kinds of Shareholders activism:

Individual shareholders

Large shareholders

Institutional shareholders

“Individual or institutional can be a large shareholders”

Individual Shareholders

Lewis Gilbert - First individual activist- 1932, owner of 10 shares, of NY

Consolidated Gas Company- Gilbert and his brother pushed a

reform- 1942, SEC, created a rule Lee Greenwood- General Mills Management- wheaties

• Evelyn Y. Davis (raises hell)- most well known and featured in

People Magazine- Shareholders of about 120 firms- Attended 40 meetings annually- Berated executives in decisions &

pay- “corporate gadflies”

Large Shareholders

• Kirk Kerkorian-the largest shareholder of Chrysler-active & influential-have large vested interest in

running the company, battled with former Chrysler chairman Robert Eaton

-suggested disbursement of cash holdings into stock repurchases or dividends

-Bill Gates

• owns over 8 percent of Microsoft Corporation

• both a manager & owner(minimizes conflict of interest

problems)• Strong vested interest• Minority shareholders directly

benefited on his interest• Monitor fellow managers

Institutional Shareholders

• Exert effective influence• Much greater chance of success

than individuals• Are large shareholders• Ex. Pensions Funds, Mutual Funds,

Insurance, Bank trusts, Non-US Investors

• Organizations that invest in securities

• Council of Institutional Investors ( CII)

Types of Shareholders

A. Shareholder Proposals-SEC rules permit anyone owning

more than $2,000 or 1 % of firm’s stock on continuous basis for a least a year to submit a proposals to be considered and voted on at a meeting of the shareholders

-Rule 14a-8, the SEC gives shareholders a method to

suggest changes in corporate governance

• If it meets company by laws requirements and related to its business, company is required to include summary of the proposals to proxy statement issued to all shareholders at the annual meeting

• Be voted by all shareholders

• If it passes, it becomes binding or advisory on management(depends on the nature & types of proposals)

• Nomination for elections of directors are prohibited

• Nominations are done under the company’s internal bylaws or independent campaigns known as

Contested election of directors or Proxyfight

Proposals includes:

governance –oriented 1. antitakeover amendments, 2.

shareholders voting rules, 3. board compositions social goals 1. human rights abuses--proposals do not pass, especially

those that go against management desires

Proposals fails due to:

difficult and expensive management collects proxy

cards before the meetingProxy cards- give management the

authority to act on behalf of the shareholders in voting

Management controls the votes of the uncommitted shareholders

Contested Election of Directors( Proxy Fight)

• try to replace directors serving on the board

Proxy solicitation-attend the board nomination

process, and present your choice for your directors directly to the shareholders

Shareholders Lawsuits

misconduct of officers and directors gives shareholders legal grounds to bring lawsuits

GOAL OF LAWSUIT:• To force the executives to follow

company by laws in the actions they take

• To force the offending party to pay the shareholders for the lost value of their stock

2 Types of Lawsuits

1.Derivative Lawsuit• “Derivative” because the

shareholders are not actually the parties suing.

• A legal action --where one or more shareholders

sue the CORPORATION --to bring suit against the

corporation

2.Direct Lawsuit• Shareholders themselves file a

lawsuit against officers and directors of a company

• A legal action • where one or more shareholders

sue DIRECTORS or executives directly, rather than through the CORPORATION, for breach of duties.

 Class action lawsuit- type of lawsuit where all shareholders join together in a single lawsuit.

 Professors Ferris, Jandik, Lawless and Makhija

• Identified 215 derivatives lawsuits filed against 174 companies over the period 1982-1999

• They compared the following key variables related to corporate governance at the time the lawsuit was filed.

• They found out that derivative lawsuits can be an effective corporate governance mechanism because they can lead to changes in the composition of the board

Does Institutional Shareholders Activism work?

• According to one study commissioned by CalPERS, Steven Nesbitt of Wilshire Associates conducted a before & after analysis of 42 firms targeted for reform by CalPERS. After the analysis the stock return of the 42 firms for 5 year period are 52.5% higher.

• Michael P. Smith of Economic Analysis Corporation conducted another study of CalPERS Activism works through gaining 19M for only total Cost of 3.5M.

• However in another study, author found that shareholders activism did not lead to any obvious improvement in firm performance.

• In conclusion, due to inconsistent evidence, whether activism really changes firms for the better is unknown.

Potential Road Blocks to Effective Shareholder Activism

• Short-term view of the Investors limits their desire to be activist. They simply sell the stock instead of working to change the firm.

• In private pension fund, private fund adviser face huge conflict of interest problem. Executive do not want to see activism by shareholders because it interface with their activities, that’s why private fund adviser that is activism do not last in a company.

• Legal/political and regulatory environment prohibits or discourages institutional investor from becoming too large, from acting together and from becoming significant owners.

• If there is no legal restriction, shareholders activism can be like the case of hedge fund. It had success or partial success, 2/3 of the time when they proposed strategic, operational and financial remedies for companies in which they were large shareholders.