Are Special Interests Taking Over Your Companies?

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Shareholder activists of all types are onto something: They can utilize the public marketplace to get their points across. That strategy is gaining effectiveness, and although many investors' knee-jerk reaction may be to fret about the dangers of "shareholder democracy" to the companies they've invested in, that's a misguided fear.

ProxyMonitor.org has been tracking shareholder resolutions at the largest 150 U.S. public companies, and it's generated some interesting findings. Its most recent report contends that "a small number of activist shareholders have increasingly sought to use their equity stock holdings to exert influence over business management."

Consider organizations like the AFL-CIO, People for the Ethical Treatment of Animals, and even ticked-off Catholic nuns, all trying to gain some voice regarding managements' decisions. Does this worry you? Think twice: Investors shouldn't assume such shareholder agitation is necessarily bad for long-term returns, though.

"Captured" corporations?
According to ProxyMonitor's data, 98% of all shareholder proposals since 2008 have emanated from three specific subsets of investors:

  • "Corporate gadflies" like Evelyn Davis, and members of the Steiner, Chevedden, and Rossi families.
  • Pension funds and organizations affiliated with both public and private labor unions.
  • Social investors affiliated with religious groups or public policy groups.

In addition, ProxyMonitor's data mining shows that certain industries bear the brunt of such shareholder activism. Manufacturing companies were subject to twice as many shareholder proposals than technology companies. Energy and financial services companies also tend to be major targets for shareholder agitation.

ProxyMonitor's report concludes: "On balance, the empirical evidence analyzed in this report tends to throw into question the push for 'shareholder democracy' and suggests that shareholder activism in the form of shareholder proposals submitted on the proxy ballots of publicly traded companies may be more a vehicle for interest-group capture of corporations rather than for mitigating agency costs and improving shareholder returns. Further studies are necessary, however, to solidify this conclusion."

Indecent proposals?
I ran a search on Proxy Monitor's site for socially based shareholder resolutions filed at public companies by "special interest" activists from 2008 until the present. Here are a few interesting ones.

  • For years, PETA has filed animal-rights-related shareholder proposals at companies such as McDonald's (NYS: MCD) , Pfizer (NYS: PFE) , and Wal-Mart (NYS: WMT) , among several others.
  • AFL-CIO has filed socially spirited shareholder resolutions at companies such as Boeing (NYS: BA) , Apple (NAS: AAPL) , and JPMorgan Chase (NYS: JPM) . These agitations have run the gamut from demanding political campaign contribution disclosures to health care reform policies.
  • Religious groups file plenty of proposals in line with their moral principles. For example, Altria (NYS: MO) is a frequent target, with groups like Sisters of Charity of the Incarnate Word, Sisters of St. Joseph of Carondelet, and Sisters of St. Francis all having filed resolutions about the controversial health effects of tobacco over the years. The Episcopal Church and the Presbyterian Church have tried their hand at filing resolutions with public companies on social issues as well.

When free marketeers distrust the free market
Such "shareholder democracy" seems to turn off some investors (and it certainly irritates many corporate managements). Like it or not, shareholder activism fits perfectly into the way a true marketplace works. Shareholders are partial owners, and those who invest in public companies are entitled to their say.

One way to get corporations' attention on important issues is most certainly to buy up some shares and bring up risky issues that ultimately could have a negative effect on corporations' futures.

Investors who develop fear or distrust of "corporate gadflies" like John Chevedden are misguided, too. These individuals have fought long and hard for solid corporate governance policies at public companies, and some corporations have even started doing the right thing in response. Good corporate governance policies help ensure that corporate managements and boards are working for shareholder interests instead of their own.

Consider the quote widely attributed to Voltaire: "I disapprove of what you say, but I will defend to the death your right to say it." The idea that many supposed free-market proponents would want to shush up shareholder activists they disagree with actually defies true market principles.

Last but not least, corporate management teams that dislike shareholder criticism or scrutiny shouldn't be publicly held to begin with. If you'll accept folks' money to develop your business, you should be willing to listen to what they have to say about the future.

If there's anything we investors should fear, it's the tendency for passive investing, which allows corporate managements unbridled power, or could allow some special interests to exert too much sway. Thoughtful investors take their ownership seriously, consider risks in the marketplace, and listen to what other shareholders have to say.

Forget the dangers of "special interests" throwing their money into the investment pool at public companies and making some noise; it's time all shareholders take a real interest in the issues that face the companies they've invested in. True share ownership goes far beyond stock price.

Check back atFool.comevery Wednesday and Friday for Alyce Lomax's columns on environmental, social, and governance issues.

At the time this article was published Alyce Lomax does not own shares of any of the companies mentioned. The Motley Fool owns shares of Apple, Altria, Wal-Mart, and JPMorgan Chase. Motley Fool newsletter services have recommended buying shares of McDonald's, Apple, Wal-Mart, and Pfizer, as well as creating a bull call spread position in Apple and a diagonal call position in Wal-Mart. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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