Shareholder activism putting boardrooms under siege

Encouraged by new governance legislation such as Sarbanes-Oxley, shareholder activism is on the rise in corporate America. At issue are not just traditional concerns, such as management compensation and choice and conduct of directors, but new areas of social responsibility such as the environment and workers’ rights.

At the same time, this in-your-face approach to determining the future of corporations has spread far beyond shareholders to a wide range of other stakeholders as well: Organized labour and community groups also seem intent on having their views reflected in the way companies conduct their business.

“Activism is spreading well beyond its initial borders,” says Dr. William J. Catacosinos, senior partner in the Laurel Hill Advisory Group of Jericho, N.Y. “We have recently seen the scions of John D. Rockefeller, who created Standard Oil, going after Exxon over its environmental protection policies.

“I think in future we can expect almost all areas of the way corporate America conducts itself will come under the magnifying glass.”

The recent surge of activism was fuelled by situations such as Enron, says Dr. Catacosinos, in which senior executives and directors placed personal benefit above those of shareholders. “What you are seeing now are demands that executives pay attention to the owners of the company (the shareholders) – and the people their activities impact directly (the stakeholders),” says Brad Allen, senior vice president, Laurel Hill Advisory Group.

“They want to ensure that corporate actions reflect their views and, as owners, they have that right if they can get majority support.”

One of the current challenges for boards and management is simply identifying key shareholders and spotting issues before they reach the boiling point. Laurel Hill, which has in past focused on shareholder communications strate gies and programs, has begun providing advisory services on effective response to stakeholder and shareholder activism as well.

“It is something we have been doing for about four months now,” says Dr. Catacosinos. “We are already starting to get calls from corporations, from executives and directors about issues that are starting to impact them. I think it is a wonderful step in a very positive direction – eventually it will create better management and shift the focus from boosting short-term financial quarterly results to long-term growth and benefits.”

While effective shareholder identification and communication is essential preparation, companies are also on notice that shareholders are no longer willing to accept mediocre performance.

“Canadian executives should be thinking about and aggressively working to close the value gap; keeping stocks from becoming significantly undervalued,” says Eric Rosenfeld, CEO of Crescendo Partners, a New York-based investment firm that aims to “unlock the value” in companies in which it invests.

“I think that shareholders have seen that activism, when done properly, can lead to greater returns, so I think they are likely to continue to be supportive of certain activists in the future,” he says.