Proxy War: Activists Can Fight for Corporate Seats

By Joel Schectman, Newsweek

01 September 10

Thanks to a new SEC rule, activists may try to replace board members at Massey Energy and Chevron.

ntil last Wednesday, unions and activists who wanted to change corporate policy had to do it the old-fashioned way: lobby lawmakers, muster public pressure, and push for boycotts. But last week the Securities and Exchange Commission handed them a brand-new weapon to fight companies on social-justice and workers' rights issues: the corporate ballot box. The new rule allows shareholders to field their own candidates for corporate boards and place them on the same ballot as management's picks. Sought by advocates of corporate accountability for more than 30 years, it could change the way activists deal with corporations, allowing unions, for instance, to help elect a labor-friendly director on the board of Massey Energy, the company responsible for the deadliest mine disaster in 25 years, which workers regard as particularly unconcerned with safety. "This is a definite sea change," said Simon Billenness, an Amnesty USA board member who works on shareholder advocacy for the organization. "With the SEC's decision, power has shifted away from company management, and when we are talking with shareholders about possible actions, we have a new tool."

The new power to activists and unions - whom opponents like the U.S. Chamber of Commerce describe as meddling "special interests" - is part of larger shift in authority away from CEOs toward boards and shareholders. Up until the mid-1990s, board members were considered servile advisers to charismatic CEOs. Corporate chieftains like Enron CEO Kenneth Lay or WorldCom's Bernard Ebbers could run their houses as they saw fit, as long as share prices continued to climb. Boards were rubber-stamp committees, and members who stepped out of line would get pushed off. In that world, shareholders and third parties couldn't hope to influence company strategy or policy.

The collapse of Enron - in which an entire corporation took management at its word - changed all that, and new laws and mores empowered boards to hold their CEOs to account. "CEOs have lost the ability to control everything - they have lost their strangleholds over boards," said Patrick McGurn, executive vice president of Institutional Shareholder Services. "Even strong performers can be thrown out." Witness the board-engineered ouster this month of Hewlett-Packard's Mark Hurd after an allegation of sexual harassment.

The new SEC rule could devolve power even further, allowing shareholders to advertise their board nominees alongside management on the list that goes out before a company's annual meeting. That way, activist shareholders - displeased by a company's treatment of workers, harm to the environment, or executive compensation - can elect a similarly minded reformer to the body most responsible for planning the company's direction. An outsider brought in by a powerful campaign could shake things up among a calcified board. Directors, who might be serving on eight or nine other boards, would have to deal with a new member elected for the sole purpose of asking tough questions and ordering tough investigations. Think 12 Angry Men: one aggressive director wouldn't have a voting majority, but he might be able to hold sway amid a flaccid majority.

How would this work? The Change to Win Investment Group, which helps mobilize union pension funds around accountability issues, told NEWSWEEK it sees Massey Energy as "a possible candidate" for a boardroom putsch, because of its "abysmal" safety record. The energy company had racked up 495 safety violations at the Upper Big Branch site in the year before the explosion, which killed 29 workers. "This was a failure of the board, which resulted in an unacceptable loss in human life and shareholder value," said Michael Garland, Change to Win's director of value strategies.

Unions had complained for years about safety issues at the company, and the Change to Win Investment Group had launched a campaign against the reelection of some board members last March, even before the accident. But back then, the only thing groups like Change to Win could do was lobby against management's choices. Now they can offer the threat of their own candidates. "With the specter of [outside candidates on the ballot], they will be ignoring the shareholder at their own peril."

Still, it will be just as difficult to wage single-issue a proxy fights - by which shareholders take control of a company - as it will be to elect single-issue political candidates. To start with, shareholders need to own 3 percent of the company's stock for three years in order to put their own candidates on the ballot. For a large company like Massey, that would mean hundreds of millions of dollars in stock. "These are very big hurdles to pass. I don't think people pushing single issues are going to get very far," says McGurn. Especially considering shareholders are much more about profit than good governance. In order to build coalitions large enough to push through a candidate, activists will have to prove that the board has fallen down on its overall responsibility to shareholders. In the case of Massey, the company's safety record caused it to lose 40 percent of its stock value: that is an argument shareholders understand.

Yet some of those pushing for changes in the boardroom have real muscle. In March, nine huge public pension investment funds, with $500 billion in combined assets, asked their investors to vote against the reelection of a Massey board member. With the new rules, coalitions like that could elevate their own picks - think of an aggressive former attorney general who had prosecuted safety lapses - to corporate boards.

Chevron is another company where activists may go after directors. An attack on Chevron's board would be aimed at getting a settlement for a lawsuit brought by Ecuadoran Indians in the early 1990s. That suit, which asks for $27 billion in damages, alleges that Texaco, which Chevron bought in 2001, contaminated vast areas of the Amazonian rainforest by dumping millions of gallons of oil into the jungle. In an e-mailed statement, Chevron says Texaco cleaned up the sites decades ago and that the case is a high-stakes deception run by New York trial lawyers.

By itself, Amnesty could never purchase enough stock to make an attack on the board. But the human-rights organization has in the past formed alliances with deeper pockets - including the New York City employee-pension fund, which had more than $600 million in the company's stock - to file nonbinding resolutions asking for Chevron to settle with the Indians. Activists say that Texaco and Chevron have drawn out the case for decades through legal maneuvers and that the time has come to go after the board. "In the case of Chevron, there is a real question of whether this board is capable of resolving this liability and settling with the people that have been affected," said Simon Billenness, the Amnesty USA board member. "It raises the question of whether these are the right people for the job or whether we should use this new tool and push for someone different."

The rule change comes at a time when corporate America has proven that it needs supervision. The connection between unethical behavior at companies like AIG, which authorities says used fraudulent schemes to mask problems, and the massive loss of shareholder value has never been clearer. It won't happen overnight, but the SEC ruling is a big step toward bringing in outside voices that may help keep companies honest.