Majority Voting Debate, Hedge Fund Activists Lead 2005 Proxy Season

Shareholder services company Georgeson Shareholder has found, in its 2005 annual corporate governance review, that the total number of shareholder proposals has decreased along with the number of contested solicitations.

In previous years, activists have concentrated on how boards of directors use poison pills and stock options. But this year, activists have focused on changing the way directors themselves are elected. Shareholders of 79 companies proposed a rule that directors could win or maintain their board seats only by a majority vote, and 55 companies then placed the majority-voting proposal on their proxy ballots. The majority voting resolution has bee a great success in 2005, with 43% of votes, at 13 shareholder meetings, cast in favor of it.

The report also shows that hedge funds have tried to wield their influence on mergers and acquisition deals. In some cases, hedge funds, such as Providian Financial, MCI and ShopKo Stores, pushed for a higher price if they owned shares in the firm being targeted, or, if they were shareholders of the acquirer, they attempted to totally block the deal.

Whether or not a company heeded hedge fund shareholders' wishes depended upon what percentage of shares the hedge fund owned. For example, Beverly Enterprises understood that its shareholder base had changed to mainly arbitrageurs and hedge funds. Thus, upon getting an aggressive bid from a group of dissident shareholders, the firm announced it would stop its "stay the course" strategy in support of an auction. On the other hand, when long-term investors dominated a company's shareholder framework, even verbal hedge fund managers failed to stop promising strategic mergers.

"Our clients depend on our in-depth analysis of the proxy season each year as they seek to understand and better manage the key issues of interest to their shareholders," said William M. Crane, president of Georgeson Shareholder. "We have seen that while shareholders may change their focus from year to year, their desire to influence companies has not abated, and companies must continue to effectively communicate with shareholders regarding the rationale and strategy behind their views."