Shareholder activists step up the pace in the US

Arkansas When Walmart shareholders gather in Arkansas this week, any investor dissent at a company still controlled by the family of its founder is likely to have little immediate impact. But the fact that large shareholders are willing to oppose board members over what they see as a failure to oversee Walmart's Mexican business, hit by recent allegations of bribery, highlights the restless mood among US investors. Investors, frustrated by poor performance, are tapping into a backlash against a system in which the rewards accrue to those at the top of society, regardless of how well they do. "The contract between employers and employees has been broken, where people have been able to be more critical of corporations than perhaps they have been in the past," says Anne Sheehan, director of corporate governance for the California State Teachers' Retirement System (Calstrs). But they have also been handed effective new tools by regulators to vent that frustration, forcing boards of directors to become more responsive. This has caused a fundamental shift in a country where the overriding assumption was that an unhappy investor had two choices: to sell or to sue. John Wilcox of Sodali, a consultancy that advises companies on corporate governance, says that for more than 30 years the relationship between US public companies and their owners has been largely antagonistic. "The US is adversarial, the legal system says, ‘Fight first and ask questions afterwards'." Jonathan Feigelson, general counsel and head of corporate governance at TIAA-CREF, which manages $487 billion (Dh1.79 trillion) of assets for university professors and non-profit workers, describes an environment in which boards have been wary of engaging with their investors in private. "What you frequently hear from directors is, ‘Anything we say, we'll end up in a lawsuit'." Regulatory thrust Meanwhile, the authorities' priority was to make sure that investors could make an informed decision whether to sell. "The whole regulatory thrust is queued up to make sure that you have information in the markets, it's why the SEC is so hot on disclosure," says Anne Simpson, head of corporate governance for the California Public Employees' Retirement System (Calpers), the nation's largest public fund. It was only in 2004 that Pfizer became one of the first big companies in the US to adopt majority voting in boardroom elections. As recently as five years ago most US listed companies held votes where an unopposed director needed only one vote in favour to remain in place. Such corporate reluctance to respond to their owners forced investors to seek resolution from legislators and regulators. In 2009, the SEC ruled that brokers, who tended to vote with managements, could no longer cast client votes, removing a significant block of natural support for boards. Then the Dodd-Frank financial reform legislation introduced say-on-pay rules that from last year gave shareholders in every listed US company an advisory vote on executive compensation. The effect has been to give investors a way to make their anger felt. "Shareholders have been able to make a surgical strike at the target of compensation, without having to enter the arena to take on directors," says Ms Simpson. Citigroup, the only member of the S&P 500 to lose such a vote so far this year, is the highest- profile victim. Not everyone sees this as a radical stirring. "What was amazing about last year — the first year of say on pay in the US — is that shareholders largely ignored the proxy firms," says Minor Myers, professor at the Brooklyn Law School. While Institutional Shareholder Services, an advisory firm, recommended that shareholders vote against pay at about 12 per cent of companies, less than 3 per cent ended up losing the votes. Yet the true effect may be a subtle shift towards conversation. TIAA-CREF says it has had meetings with more than 600 companies in the past 18 months, far more than before say-on-pay was introduced. "What we are really seeing more of is shareholder engagement," says Feigelson. "I think there are some high-visibility examples of discontent, but I think really what is happening is just more engagement."