Individual shareholder activists and are a force to be reckoned with
You can find anything in a shareholder base. Paris-based corporate governance advisor Sophie L'Helias discovered that last year at the Eurotunnel annual meeting. Having collected proxies to wave in the face of a company teetering on the edge of bankruptcy, L'Helias finally opted to vote on the side of management. And that's when the trouble really started: she was physically threatened by angry shareholders despite being seven months pregnant. 'If shareholders feel a company hasn't treated them fairly, they'll revolt. At Eurotunnel, there were picket lines in the streets, and fighting in the meeting. The CEO even got several death threats.'
Other nationalities may not have quite the same revolutionary temperament as the French, but evidence suggests that individual shareholder activism is gaining momentum around the globe, despite the domination of institutional ownership of capital.
Still, according to Kit Bingham of the UK's Pensions Investment Research Consultants (Pirc), individual shareholders have little influence without institutional backing. 'When individuals get angry and get together, it can cause problems for companies but it's rare that it happens effectively. Running a campaign is very costly and because individuals are usually quite dispersed, the logistics are a nightmare.' Bingham points to Pirc's resolution at Shell last year as an example of disgruntled shareholders linking up effectively with institutions. 'We acted as a magnet for individuals who were unhappy with what Shell was doing.'
Andre Baladi, the Geneva-based financier who describes himself as the only real individual activist in continental Europe until recent years, goes further, arguing that to be truly effective, individual investors have to themselves become institutionalized.
Baladi points to Bob Monks (founder of Institutional Shareholder Services and Lens in the US) and, being a consummate self-publicist, to himself. One of his most recent successes involved linking up with institutional giants Templeton, Fidelity, TIAA-Cref and Mercury to persuade the French government to reverse its decision to force a handover of Eramet's nickel mine rights to New Caledonian. 'Because I had the support of these big institutions, I was able to demonstrate to the new government that by intervening in companies in this way they were jeopardizing future privatizations.'
Crowded out
Despite Bingham and Baladi's claims, there have been a number of high profile cases where individual shareholders have achieved success without institutional support.
Take British Gas, which had to change the venue of its 1995 annual meeting to make room for the thousands of angry individual investors who wanted to attend. As shareholders they were concerned by the excessive levels of compensation some of the company's top executives were getting, while as customers they were unhappy with the service British Gas was providing.
Although the shareholders didn't achieve anything concrete, the whole episode was a public relations nightmare, which British Gas only finally managed to recover from by demerging. Three years on, the company has a new name ('BG'), a new management team and a new reputation. It hopes. As the company has only recently found its way back from the news pages onto the business pages, the IR department is reluctant to comment.
In other countries, individual shareholders have established significant leverage at companies through organizing their activities. Take Australia, for example, where the Australian Shareholders' Association acts as a self-proclaimed vigilante group for its 3,000 or so members. 'We operate on a macro level to improve corporate regulations and on a micro level to track companies' performance and issues like executive remuneration,' says Tom Rado who is honorary secretary for the ASA's Victoria division.
Although the ASA puts out position papers rather than shareholder resolutions, Rado says companies have learnt that they need to pay attention to what the organization thinks. Its biggest recent success was at Coles Myer where it was instrumental in forcing one director to resign, and another to step down as chairman. Both were using their positions on the board to gain contracts for their own companies. 'The momentum we created was so big that the institutional investors couldn't ignore us,' comments Rado.
The Swedish Shareholders' Association has achieved even greater success. In autumn 1993, it organized opposition to the proposed Volvo-Renault merger. 'The conditions laid out in the prospectus were not good so we linked up with other groups and told the company that we weren't having it,' says Birgit Malmenstam-Skytt, the SSA's secretary general and president of the World Federation of Investors.
This wasn't the first time Volvo had been stopped in its tracks. Back in 1979, the company tried to sell 50 percent of its holdings to the Norwegian government but the association baulked at the conditions being offered. 'Nowadays companies don't dare to do the sort of things they did before. They can't be unethical because they know we won't let them get away with it.'
There is something distinctly Swedish about Malmenstam-Skytt's matter-of-fact attitude. She cites another case this May when PC Express tried to issue new shares, valued at SKr22 mn, to four specific investors. Led by the association, shareholders revolted at the annual meeting, forcing the company to have an open issue, valued at SKr39 mn. 'What is the point of making four extremely rich individuals richer? It's just not fair.'
Fair on firms
In the US where the word 'fair' has never had quite the same resonance, individuals have also managed to achieve a certain amount of leverage. Again, national traits are evident, with individualism rather than collectivism characterizing the manner in which most American shareholder activism operates. According to Pat McGurn of proxy advisory firm Institutional Shareholder Services (ISS), gadflies come and go each season, although there are some perennial players.
Take John Gilbert, for example, who along with his late brother Lewis Gilbert, has been pressurizing companies since the 1930s. 'I'm a threat to bad management but an asset to any chairman with a fine sense of valuation,' says the 85-year-old Gilbert who proudly reveals he is also an honorary circus clown. He hands out red noses to other shareholders at the meetings he attends, accompanied by extended shoe horns for directors - because most are so old they can't bend down to put on their shoes, he explains.
Another household name in the US is Evelyn Davis, a Holocaust survivor who holds stock in some 110 companies and likes to attend around 40 annual meetings a year. She also lobbies the White House for minority shareholder rights. 'I've met Carter, Reagan and, this May, Clinton. He was very non-committal,' says Davis.
Characters like Davis are often viewed as a nuisance by institutional investors as well as by companies. Pirc's Kit Bingham remembers working at Lens and dreading the occasions when Davis was backing the same resolution as them. 'It made it much harder to get the company to take the issue seriously.'
However, despite their often eccentric behavior, gadflies' long-term badgering of companies has had a profound effect. 'A decade ago, the Gilberts and Evelyn Davis were proposing resolutions on issues like staggered boards and cumulative voting. The institutions wouldn't have anything to do with them; they thought they were takeover rather than accountability issues,' comments McGurn. 'Now there's been a 180 degree swing in their favor. These are considered mainstream issues that get substantial support on a regular basis. The Gilberts and Davis have literally kept them alive.'
Meeting magnet
But what motivates these individual activists to go through the often lengthy and bureaucratic proxy process when, in many cases, they have very small shareholdings in the companies in question?
Davis dismisses the question: 'Someone's got to do it.' For others there is a missionary-like zeal about their attitude. Ekkehart Wenger (see above), a professor in banking and finance in the department of economics at the University of Wuerzburg in Germany, who has caused havoc at several German multinationals, is disgusted at what some corporations try to get away with. 'My main motivation is to stop management from taking too much money out of shareholders' pockets,' he says.
Similarly, Andre Baladi sees his role as a promoter of Anglo-Saxon attitudes in continental Europe. 'I don't like to think of myself as an activist. Rather, I am a shareholder value enhancer. I want to bridge the gap between corporate officials and investors and to teach European people about Anglo-Saxon ways.'
Baladi, who runs his own pension fund, is also candid about his personal financial motivation. 'I want to enhance my portfolio at the same time as furthering the growth of pension funds in continental Europe.'
Meanwhile, organizations like the Swedish Shareholders' Association, the Australian Share-holders' Association and, in France, L'Anaf, consider themselves as trade unions. 'We are a social watchdog and an organization that teaches its members what to do,' comments Birgit Malmenstam-Skytt from the SSA.
In some countries, however, individual investors have no such protection. In Japan, for example, the infamous corporate racketeers, the sokaiya, have largely poisoned the annual meeting as a democratic institution, making it difficult for any kind of shareholder activism to grow - particularly with most meetings at the same time on the same day. Companies need to have the protection of certain sokaiya to ward off others and a mutually dependent relationship has developed. Consequently, annual meetings are rather superficial and the issues raised are rarely taken seriously.
However, some legitimate individual investor activism does exist in Japan and, according to John Taylor of the Investor Responsibility Research Center in Washington, DC, individual investors are leading the way. 'A lot of their proposals are completely off-the-wall and most get very little real support but they're doing better than before,' he says. Areas of concern generally center on anti-nuclear and environmental issues and investors have managed to get some support from foreign institutions like Calpers.
'The main significance of individual investor activists in Japan at the moment is that they're establishing a mechanism for getting things changed,' suggests Taylor. 'Some day, hopefully, some of the institutional investors may start using the mechanism.'