Shareholder resolutions reached a record number this year - 862, up from 802 last year - according to a proxy season overview report by prominent activist proponents.

The deadline for most shareholder resolutions may be over, but that isn't the end of the story. The Investor Responsibility Research Center/Interfaith Center on Corporate Responsibility of Washington predicts that companies will face a slew of resolutions achieving significant support from investors.

Making Life Tough

Companies don't have to act on those resolutions, of course, but the market's substantial focus on corporate-governance issues means that investors are likely to make life tough for corporate management that ignores their concerns.

"Even if companies don't follow resolutions to the letter, when boards look at their issues, the numbers will be so compelling that they'll be forced to act. If nothing else, [significant support for shareholder resolutions] will wave a very large red flag," said IRRC Director of Social Issues Services Meg Voorhes at a press conference last week.

Additionally, the powerful New York City Pension Fund (NYCPF), a collection of six funds, has filed a resolution requiring companies - including Gillette, Goodyear Tire & Rubber, Hasbro Inc., Pacific Healthcare and Wisconsin Energy Corp. - to act on any shareholder resolution that receives over 50% support, added Tim Smith, president of the Social Investment Forum and senior VP of Walden Asset Management.

"There have been too many cases in which management has watched shareholder proposals garner 60% or 70% of the vote and then gone merrily on its way," he said.

Smith's criticism is echoed in the dramatic rise in shareholder resolutions targeting corporate governance, which accounted for 625 resolutions, a sharp 18% rise from 529 last year. Corporate-governance resolutions were augmented by social responsibility resolutions, the line between which is becoming increasingly blurred.

All in all, as of Feb. 1, social and environmental resolutions, including some related to global warming, numbered some 237.

Another trend is that activist investors that previously occupied different realms are starting to converge; traditional corporate governance activists are increasingly teaming with labor unions, religious investors and socially responsible investors, the report said.

Resolutions on social issues are likely to number around 250 this year, but judging from companies' capitulation last year, not all of these will go to vote. Of the 273 social proposals filed in 2002, only 147, or 53%, got as far as the ballot box.

Leading categories for socially responsible investors this year included 58 resolutions targeting companies' global warming policies and 27 for global labor standards. Others targeted companies' sexual orientation and anti-bias policies, tobacco policies, and issues related to curtailing the AIDS pandemic.

Most notably among these is the NYCPF's proposal that CBRL Group, best known for the Cracker Barrel brand, include an equal-opportunity policy provision against discrimination based on employees' sexual orientation, a proposal that won 58% of the vote.

Global warming proposals typically focused on companies' disclosure, or lack thereof, regarding operating, financial and reputational risks on their part in the changing climate. Resolutions are still pending at Caterpillar Inc., ConocoPhillips, Gillette, Marsh & McLennan, Reebok International and Staples, but the resolution has been withdrawn at Occidental Petroleum and Cummins after they agreed to disclose the information.

However, companies should expect shareholder action in the future if the figures they disclose regarding greenhouse gas emissions don't improve going forward, said California Environmental Resources Evaluation System Executive Director Mindy Lubber, another panelist.

"A show of action is not the same as real action, and it only distracts from making the commitment and assessments that need to be made," she said.

Corporate-governance issues continue to account for the lion's share, though. Resolutions asking companies to expense stock options rocketed up the charts this year, accounting for 101 proposals, almost exclusively by labor unions, compared to just two last year.

Rich Man, Poor Man

Executive pay is also under fire, and Alcoa, AOL/Time Warner Inc., El Paso, Honeywell International, J.P. Morgan Chase and Pfizer have all been asked to report to shareholders the difference between top executives' pay and what their lowest-paid workers earn. This has caused consternation at two of the companies, whose efforts to evade the resolution have, in turn, angered shareholders.

"I am astonished to have to report that J.P. Morgan Chase has challenged the resolution at the Securities and Exchange Commission, requesting clarification of the following terms: Lowest-paid worker, total compensation and top executives. Can you imagine?" exclaimed Pat Wolf, executive director of ICCR, whose members manage a combined $90 billion in assets.

Wolf was similarly critical of AOL/Time Warner, which she said had complained to the SEC that it could not comprehend the term "top executive" and that "lowest-paid worker" was too ambiguous.

"This is obstructive and damaging to their image, especially now," she said.

This year saw a significant increase in the number of resolutions requesting a split between the CEO and chairman roles, primarily filed by labor unions. While there were only four such proposals last year, they received an average 36% support.

Controversially, six resolutions asked companies to allow shareholder-nominated director candidates on their proxy statements, a proposal that companies have contested with the SEC. All six proposals, which targeted ExxonMobil, Bank of New York, Citigroup, Sears Roebuck, AOL/Time Warner and Eastman Kodak, were filed by the American Federation of State, County and Municipal Employees, the nation's largest public employees' and healthcare workers' union.

While 2003 may have seen the highest- ever number of shareholder proposals, Smith noted that many companies are working to meet activist investors' concerns before they reach the shareholder resolution stage.

"Many companies are stepping forward and updating their corporate governance practices, being more transparent on issues such as the environment and adopting new policies, creating new models for other companies to follow," he said.

But this may not have been the case were companies not struggling to bolster shareholder confidence, Smith added.

For their part, institutions are consciously moving from passive holders in stock to becoming active and responsible owners. Investors are increasingly viewing many corporate governance, social and environmental issues as fundamentally linked to shareholder returns, he said.

"Two thousand and three will be remembered as a year when investors decided to stand up and be counted, using their voice and vote to call for strengthened corporate governance and solid corporate citizenship," Smith said.

Howard Stock is editor of sister publication Investor Relations Business.

Copyright 2003 Thomson Media Inc. All Rights Reserved.

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