Researching shareholder proposals and corporate governance issues

January 2008

IN THIS ISSUE

— Corporate governance and shareholder proposals
— Shareholder proposals as a research tool
— In the next issue

GREETINGS!

Welcome to the January 2008 edition of our newsletter. We’ll kick off the new year looking at the usefulness of shareholder proposals for research, and how the recent SEC decision to allow companies to bar shareholder proposals from going before all shareholders for a vote may affect these research efforts.

CORPORATE GOVERNANCE AND SHAREHOLDER PROPOSALS

The voices of large institutional shareholders, and also smaller individual shareholders, have always been key components in agitating for change at publicly traded companies. Sometimes this process can be abused by so-called “activist shareholders” (also called “distressed investors,” or less charitably “vulture investors”) who buy a minority stake in a company they see as under performing, agitate for change at shareholder meetings, then sell out their stake as the company turns around, even if that turnaround is brief and ultimately unsuccessful.

It was against this backdrop that the U.S. Securities & Exchange Commission decided to amend its “longstanding policy on shareholder proposals” to specifically allow companies to decide whether shareholder proposals relating to “to a nomination or an election for membership on the company’s board of directors or analogous governing body or a procedure for such nomination or election” could be put to a vote before all shareholders.

SHAREHOLDER PROPOSALS AS A RESEARCH TOOL

It is somewhat unclear at the moment whether shareholder proposals that are not put to a vote would still be recorded in proxy statements. If they are not, a valuable tool for detecting the extent of self-dealing and fraud at company may be lost. In the past, we have documented how executives of public companies, particularly founders who still saw their once-private enterprise as a personal piggy bank, have acted against shareholder interest in setting up subsidiaries and other arrangements to enrich themselves and their family. In one such instance, a shareholder proposal to strip a company’s founder of his “B” class shares documented many of the abuses which had not been otherwise publicly disclosed. This proposal was also ultimately successful, and the founder was forced to accept a buyout of his shares that resulted in his losing majority control of his company’s stock.

Shareholder proposals for changes in board makeup and corporate governance have been an essential tool in combating fraud and publicizing abuses, as witnessed by the more than 34,000 letters the S.E.C. received after announcing it was considering the revision. Hopefully corporate governance at public companies can adapt to allow greater shareholder input for both large and small investors, while preventing “activists” from abusing that privilege.

IN THE NEXT ISSUE

In the February edition, we’ll examine the current efforts to combat mortgage fraud in the wake of the collapse of the sub-prime lending market.