The business textbooks say that shareholders control the company they own. Each share gets a vote and together the shareholders select directors who run the company for their benefit. But "one share, one vote" is a myth.
In most companies, shareholders can either vote for management's hand-picked slate of directors or withhold their votes. Either way, thanks to the alchemy of the "plurality" vote standard at virtually all U.S. public companies, a single "yes" vote may ensure a candidate's election. The nominees with the largest number of votes are elected, no matter how many votes are withheld or how many "no" votes are cast.
But the shareholder-democracy issue is coming to a boil. Led by activist unions, progressive hedge-fund managers and other reformers, investors at dozens of companies are lobbying for rule by the majority. And, over the last several months, about 100 of America's largest public companies have acted to head off shareholder proposals by adopting majority voting policies or bylaws. Majority election proposals are on the agenda at more than 100 shareholders' meetings this proxy season. The goal is to hold management's feet to the fire, to put an end to wink-and-nod deal-making, and to tie executive compensation to performance.
According to USA Today's annual analysis of CEO pay, the median 2005 pay of CEOs at the nation's 100 biggest corporations soared 25% to a jaw-dropping $17.9 million, dwarfing the raises earned by American workers, whose pay grew only 3.1% on average. Outsized executive compensation has been linked to fraud, earnings restatements and shareholder litigation. And repairing the broken process that allows pay and performance to diverge is probably the most important reform measure on boardroom tables.
The Securities and Exchange Commission is moving forward on Chairman Christopher Cox's proposal that executives' salaries and perks be disclosed in dollars and in plain English. But shareholders are signing on to proposals demanding that companies voluntarily expand disclosure before the government forces the issue.
Shareholders who insist on a link between executive compensation and performance know that CEOs are chronically overvalued. They often sit on each other's compensation committees. They recruit consultants who are skilled at rationalizing big salaries and bonuses. And they conceal fat retirement packages from the view of skeptical shareholders.
Examples of apparent abuse are legion. Take Hank McKinnell, chief executive of Pfizer (nyse: PFE - news - people). His pay last year exceeded $16 million even though the company's stock has plummeted about 40% since Dr. McKinnell took charge in 2001. Once he retires in 2008, he's due to make $6.5 million a year in pension benefits.
Or consider Lee Raymond, who recently retired as the CEO of Exxon Mobil (nyse: XOM - news - people) with a $398 million retirement package. Although the company reported a whopping $36 billion in profits earlier this year, most would agree that skyrocketing oil prices explain Exxon Mobil's phenomenal results more than Raymond's contributions do.
And then there's Sun Microsystems (nasdaq: SUNW - news - people), whose stock is down more than 90% from its 2000 peak. That didn't stop the company's compensation committee from awarding departing chief executive Scott McNealy more than a $1 million bonus last year, when corporate income and earnings targets were missed. McNealy was roundly criticized for resisting deep cuts in the company's 38,000-person workforce and low-cost technologies to stanch losses. When he announced his resignation on April 24, 2006, shares of Sun gained 8.4% in extended trading.
Shareholder democracy will rein in executive pay. Once investors take control of the companies they own, directors will be compelled to fully disclose and justify the pay packages they grant, or stand to lose their jobs.
But the 2006 proxy season is not only calling directors to task for approving outrageous pay packages. It's also empowering shareholders to give voice to their views on a host of emerging social issues.
Proposals have been filed at hundreds of companies demanding the increased disclosure of environmental and health risks; the abandonment of environmentally damaging projects [including Devon Energy (nyse: DVN - news - people), Dominion Resources (nyse: D - news - people), ExxonMobil, Peabody Energy (nyse: BTU - news - people) and Ultra Petroleum (amex: UPL - news - people)]; the redesign of toxic products; [Avon (nyse: AVP - news - people), Becton Dickinson, Chevron (nyse: CVX - news - people), Dow (nyse: DOW - news - people), DuPont (nyse: DD - news - people), ServiceMaster and Synagro]; the withdrawal from countries exhibiting notorious human rights abuses [Boeing (nyse: BA - news - people), Chevron, Freeport McMoRan (nyse: FMC - news - people), Halliburton (nyse: HAL - news - people) and Visteon (nyse: VC - news - people)]; nondiscrimination in employment [Home Depot (nyse: HD - news - people), Lockheed Martin (nyse: LMT - news - people), Wal-Mart (nyse: WMT - news - people) and Yum Brands (nyse: YUM - news - people)]; and improvements in wages, employee benefits and working conditions. [3M (nyse: MMM - news - people), Altria (nyse: MO - news - people), Bard, Chico's FAS (nyse: CHS - news - people), Claire's Stores (nyse: CLE - news - people), Coca-Cola (nyse: KO - news - people), Cooper Industries (nyse: CBE - news - people), Crane, Delphi (nyse: DPH - news - people), Hasbro (nyse: HAS - news - people), Hershey (nyse: HSY - news - people), Illinois Tool Works (nyse: ITW - news - people), IBM (nyse: IBM - news - people), Kimberly-Clark (nyse: KMB - news - people), Lear, Manpower, Mattel (nyse: MAT - news - people), Peabody, Schein, Time Warner (nyse: TWX - news - people), Wal-Mart, and Yum Brands].
The potential for shareholder-driven change in corporate America--and society, at large--is huge. And investors are embracing "Advocacy Investing," the strategy I developed to align one's core values with those of the companies that share them.
My original research, tracking corporate behavior over an eight-year period, found that, on the whole, companies earning the highest marks in advancing social justice and treating the environment with respect outperformed the Russell 3000. The empirical evidence behind Advocacy Investing suggests that a company's social and environmental performance helps drive financial performance.
Moreover, through proxy voting and shareholder initiatives, the strategy invites the values-based investor to the table where corporate decisions are made. Like-minded shareholders, galvanized around issues of common concern, can form potent voting blocs to address proxy issues more strategically than ever before. When a unified coalition of investors weighs in on a company's labor or vendor standards, the climate risk it poses, or its sexual orientation policies, management listens and, over time, is likely to act.
This proxy season's battle over the boardroom is already seeing the balance of power tip toward shareholders. Activists who lead the charge will help restore public trust in the capital markets, boost shareholder value and promote positive social change.
Marc J. Lane is a Chicago attorney and investment adviser. For more information on Lane's approach to shareholder activism, visit www.AdvocacyInvesting.com.
The Lane Report is a publication of The Law Offices of Marc J. Lane, a Professional Corporation. We attempt to highlight and discuss areas of general interest that may result in planning opportunities. Nothing contained in The Lane Report should be construed as legal advice or a legal opinion. Consultation with a professional is recommended before implementing any of the ideas discussed herein. Copyright © 2007 by The Law Offices of Marc J. Lane, A Professional Corporation. Reproduction, in whole or in part, is forbidden without prior written permission.