Kings of corporate management beware: Your once loyal and passive subjects have declared their independence by adopting the Shareholder Bill of Rights.
No longer will your biggest stockholders stand idly by as you take away their right to vote on questions as crucial as who will rule the corporate kingdom. Gone are the days when shareholders will watch silently as top executives adopt antitakeover devices that entrench management and depress stock prices.
Instead, with the Shareholder Bill of Rights as its guide and more than $160 billion in assets as its economic weapon, the Council of Institutional Investors is preparing to launch a campaign in support of shareholder democracy.
"We have done something very important, even revolutionary," said Harrison J. Goldin, comptroller of New York City and cochairman of the council.
"We are asserting the role of investors as a new force. As we identify issues that arise in public companies that violate the spirit of the Bill of Rights , I think you will see a significant effort to mobilize shareholder action," Goldin said.
The Shareholder Bill of Rights was endorsed unanimously by the Council of Institutional Investors Tuesday during the group's second annual meeting here. More than 30 state, municipal and union pension funds, including the District of Columbia Retirement Board, belong to the council, which was formed last year in response to controversial corporate takeover battles that hurt some shareholders.
These pension funds are among the nation's biggest stockholders. Although it is not binding on either council members or the corporations in which they hold stock, the Shareholder Bill of Rights is the council's attempt to enhance the value of their stocks by making corporate management more accountable to shareholders, especially in regard to takeovers.
But they will find it difficult to persuade management, which wants to retain power over corporate decisions, to abide by these guidelines.
The first demand in the Bill of Rights is that each share of common stock have an equal vote. "The right to vote is inviolate and may not be abridged," the Bill of Rights says.
The bill's "one-share, one-vote" rule is violated by some public companies, which have different classes of common stock with unequal voting rights. Unequal voting rights is the most effective antitakeover device in existence, because it typically is used to give control of a company to friends of management, who own stock that may have 10 votes per share, while stock owned by the public has only one vote per share.
Although this technique is most commonly used by families that wish to retain control of their companies after shares of their enterprises are sold to the public, other public corporations also have adopted two classes of voting stock as the ultimate antitakeover device.
"A share of stock without a vote is truly a crippled instrument," said Roland Machold, who directs $16 billion in pension assets for 380,000 state and municipal policemen, teachers, firemen, judges and public employes in New Jersey. Machold, who also is a cochairman of the Council of Institutional Investors, said public companies with two classes of voting stock are led by managements that are not accountable to their public shareholders.
He said the fundamental problem in many public companies is that the interests of shareholders and top management differ. If top management owns relatively little stock in the company, it usually will favor two classes of voting stock and any other device that deters takeovers and preserves its jobs. But shareholders, including pension funds, are interested in getting the highest price for their stock. Thus, shareholders typically favor the generous takeover bids that managements oppose.
"It is my contention that limitation of shareholders' voting rights will serve to entrench management, to limit the maximum realization of shareholder values and to inhibit the vitality of capital markets in the United States," Machold said.
The second demand in the Shareholder Bill of Rights is that corporations treat all shareholders equally. Unocal Corp. violated this rule last year when it defeated a hostile takeover bid from T. Boone Pickens Jr. by offering to buy its own shares from all stockholders except Pickens.
Unocal's defensive maneuver was upheld by the Delaware Supreme Court, which said the move was justified because of Pickens' reputation as a greenmailer. A greenmailer is someone who buys stock in a company and then threatens to take the company over, but drops the takeover bid if the company agrees to buy his shares for a premium price.
The Shareholder Bill of Rights, which seeks to protect investors by promoting high-priced takeovers that produce profits for stockholders, opposes the type of takeover defense used by Unocal.
"This [Bill of Rights] is intended to prohibit corporations from engaging in conduct which discriminates among holders of common stock, and requires corporations to accord equal treatment to all holders of common stock, regardless of their identity, reputation or relationship with the corporation."
The Bill of Rights also charges that corporate managements are making too many critical decisions without consulting shareholders. The bill calls on corporations to allow shareholders to vote on greenmail payments, the sale of significant corporate assets, the lucrative compensation arrangements for executives known as golden parachutes, and poison-pill provisions -- corporate devices that can be activated to make a company less attractive -- which many managements have adopted recently to deter takeovers.
The Bill of Rights also demands that corporations submit executive-compensation agreements to a vote of independent directors. Independent directors are corporate board members who do not work for the company as their primary occupation.
The Shareholder Bill of Rights is a major step for the public pension funds, which traditionally have been passive shareowners who almost always supported management. In the unusual instances where institutions disagreed strongly with management, they typically solved their conflict by selling the stock.
That strategy has changed, and the Council of Institutional Investors is about to begin the difficult task of trying to persuade corporations to abide by its Shareholder Bill of Rights. But the law appears to favor management.
Under the business-judgment rule, the courts have upheld the right of corporate boards of directors to sell assets and adopt poison-pill antitakeover devices without consulting shareholders.
The council may flex its muscles by targeting poorly run companies that violate its Bill of Rights, and then encouraging stockholders to vote against the managements of those companies.
"The real test will be to find some cases and then see if some of our individual funds might want to participate in doing something," said California Treasurer Jesse Unruh, a founder of the council. "If we find one corporation about to run counter to the Bill of Rights, we can advise each other, and maybe 10 or 15 of us will go to that shareholder meeting" and possibly launch joint legal action, he said. If any stockholders have a good chance to influence corporate management, it is the giant pension funds and other institutional investors that dominate stock trading. While individual investor participation in the stock market has been declining, the role of institutional investors has been growing.
Institutions, including pension funds, college endowments and mutual funds, account for more than an estimated 70 percent of daily New York Stock Exchange trading and about 35 percent of total public stock ownership. When the Council of Institutional Investors was formed, its goal was to mobilize the collective influence of public and corporate pension funds that own stock. However, with the lone exception of the US West Master Trust, the council has been unable to attract corporate pension funds.
Corporate pension funds, led by General Motors Corp.'s chief investment officer, Gordon Binns, recently formed their own organization. Corporate pension funds have chosen not to join the council for a variety of reasons, including concerns about the involvement of high-profile politicians, the council's antimanagement, proshareholder reputation, and the belief that corporate pension fund managers frequently are much more sophisticated investors than public pension fund managers.
Although Binns said the reason corporate pension funds have not joined the council is that corporate pension fund managers and public pension fund managers are governed by different regulations, GTE Corp.'s David Seidel had other observations.
"Some of the conversations we have had here are laced with anti-corporate-management sentiments that remind me of the campus radicalism of the late 1960s and early 1970s," Seidel, vice president of pension fund management for GTE, said at the council's meeting last week.
Seidel, who appeared to be the only corporate pension fund manager at the council meeting last week, added: "Most corporate [pension] plan sponsors find that [conversation] to be unrealistic and distasteful."
Although GTE does not belong to the council, Seidel said he hopes GTE will join the public pension funds in their fight for the Shareholder Bill of Rights, because "I think it reflects principles that are important to the well-being of American capitalism. I'm gonna go home and tell 'em this group is not as bad as everyone said."