Since 1937, brokerages have been able to vote their clients’ shares—and have generally sided with existing management. Though individual stockholders have the right to vote their shares, few do, which implies to brokers that the investor is satisfied with a company’s current management and/or policies.

Activist investors have long decried the broker vote, claiming that it makes it too difficult to enact real change at targeted companies; the SEC’s upcoming policy change will certainly be counted as a significant win for activists. “This is a huge victory for the investor community,” affirmed Ann Yerger of the Council for Institutional Investors.

The rule change demonstrates new SEC chairman Mary Schapiro’s investor-friendly attitude, as broker voting was one of the first topics she addressed upon taking office. Schapiro is expected to take up other shareholder causes in the coming months, to the chagrin of company management.

Icahn proposes an elimination of the “exclusivity” period in the bankruptcy process, in which the management of a bankrupt company is given an 18-month window in which to reorganize their corporation however they see fit, generally by shifting around debt and selling assets. “During this period,” says Icahn, “nontrade creditors, like bank debt and bond holders, languish in uncertainty as to what will happen to their investment.”

Icahn’s argument runs along his historically anti-management lines, claiming that, “the exclusivity rule mainly benefits equity holders and managements, not creditors. But why should the same management that got the company into trouble have the right to lock-up its assets for an extended period of time?”

According to Icahn’s argument, allowing management free reign in the event of a bankruptcy hurts investors and makes them apprehensive about putting their money in what could be the next Lehman Brothers. It also makes Chapter 11 bankruptcy a “crutch for lackluster managements.” Icahn argues that a change in rules would prod bankers away from Chapter 11.

Coleman is best known for restructuring computer maker Gateway before selling it to Taiwanese PC maker Acer in 2007. His appointment could result in opportunities for selling all or part of Unisys. Gateway was sold for $710 million, a 57 percent premium over Gateway’s market price at the time, according to the WSJ.

Coleman told the WSJ that it’s too early to tell whether parts of Unisys will be sold. “The board brought me in based on a reputation for improving results,” he said.

Coleman plans to “take a fresh look” at whether or not the hardware operations should be retained. Unisys, based in Blue Bell, Penn., announced last month that its CEO, Joseph McGrath, would resign by the end of 2008.

Unisys has been battling activist investment company MMI Investments, which has a 9.1 percent stake in the company and is highly critical of management. MMI has named two directors to Unisys’ board.

Coleman will succeed both McGrath as CEO and Ric Duques, the company’s non-executive chairman, who will remain a director. The unusual move is linked with the belief that unifying the roles should speed up the company’s turnaround process, according to the WSJ.

Even usually conservative Chinese companies are turning hostile as illustrated by Sinosteell’s $1-billion takeover of Midwest, an Australian iron ore producer.

Henrik Aslaksen, co-head of global M&A at Deutsche Bank, tells the FT that “the lack of credible white knights and activist shareholders pushing for quick resolutions and financing available for strategics is also fueling the high number of unsolicited bids.”

As evidenced by A-B’s acquiessence to InBev, some hostile measures are turning friendly as directors “pay attention to their duties towards shareholders,” the FT reports.  That in turn may be driving up the number of transactions successfully completed with only 31 percent of unsolicited or hostile M&As so far announced in 2008 failing compared with an average failure rate of 42 percent since 1997, according to Dealogic.

An unsolicited bid is defined as an offer with an intent to purchase the target and in the public domain that has not been agreed to or recommended by the board’s target. 

The proposed recommendations are supported by a white paper discussing the Working Group’s findings.

The Working Group focused on the following areas:

1. What corporations can do to better monitor securities holdings and learn about those accumulations of stock or extraordinary trading patterns that may reveal a hedge fund’s activism tactic.
2. What measures corporations can adopt to avoid becoming a target.
3. How boards and senior executives can react to an activism campaign and how they should respond to requests for change made by hedge funds.
4. How companies and large institutional investors can ensure integrity of the voting process in those situations where hedge funds borrow shares for the sole purpose of influencing a shareholders’ vote.
5. What considerations institutional investors should be mindful of when allocating some of their assets to hedge funds pursuing activism strategies.

The paper is available here.

Trian Partners has said in a regulatory filing that it notified Wendy’s of its intentions to expand the board and to nominate director candidates at the hamburger chain’s annual shareholder’s meeting this year, according to Reuters.

Meanwhile, Peltz’s Triarc Cos Inc, which owns Arby’s, said last fall that it made a bid for Wendy’s that was below $37 a share to $41 a share it prepared to offer in July.

Sprint Nextel has added activist investor Ralph Whitworth to its board, giving him greater influence over the major strategic decisions the struggling company is facing, according to the Wall Street Journal.

Whitworth, who owns roughly a 2-percent stake in the company through his company, Relational Investors, threatened a proxy fight against the company last fall if the management did not make vast improvements. He also set his sights on ousting former CEO Gary Forsee from the company in October.

“I look forward to assisting my fellow board members to rebuild shareholder value,” Whitworth said in a statement. “A turnaround at Sprint Nextel won’t be easy, but I believe the ingredients are in place to get the job done for the company’s shareholders. I am encouraged by the company’s new CEO, Dan Hesse. Dan has committed to review all aspects of the company’s business and shown a willingness to make tough decisions.”

Harbinger, which owns 14.3 million NYT shares (about 9.96 percent), is the publisher’s second-largest shareholder, following T. Rowe Price Group, according to the Globe.

Meanwhile, Firebrand Partners, another NYT activist investment company, has also proposed a nomination of directors for the board.

On Jan. 25, Harbinger and Firebrand nominated Firebrand Founder Scott Galloway; Allan Morgan, managing director of Mayfield Fund; former AOL executive Gregory Shove, and James Kohlberg, co-founder of private-equity firm Kohlberg & Co, according to the Globe.

NYT CEO Janet Robinson said last month that the company is willing to meet with any of its shareholders to discuss strategy, according to the Globe.

Icahn reportedowning 1.5 million shares of the Lake Oswego, Ore.-based company, whose sharesclimbed more than 20 percent after the filing.

Icahn acquiredthe stake through ARI Longtrain Inc., whose sole stockholder is AmericanRailcar Industries, which manufactures and services railcars. Icahnbeneficially owns 53.7 percent of the common stock of American Railcar.

According tothe filing, Icahn believes Greenbrier shares are undervalued and is interestedin discussing with management a possible business combination between AmericanRailcar and Greenbrier.

Greenbriersaid in a statement regarding Icahn’s move that its board is “committed toacting in the best interests of Greenbrier shareholders and otherconstituencies” and issued no further comment.

Last week, thecompany announced that it will buy American Allied Railway Equipment Co. andits subsidiaries for $83 million in cash.

Icahn is anactivist shareholder who led a successful fight to win a seat on the board ofmovie-rental giant Blockbuster, whose chairman and chief executive left soonafterward.

He has alsopushed for changes in recent years as a shareholder at other companies,including Time Warner Inc. and Motorola Inc. On Friday, he named four nomineesfor seats on the board at Motorola, where he lost a proxy fight last year.

America’s second largest pension fund sided with hedge fund Knight Vinke Asset Management against the London-based bank, Europe’s second largest, for its “casual dismissal” of Knight Vinke’s performance and governance concerns.
 
“We welcome a constructive dialogue with our shareholders and are disappointed that this letter has been leaked,” the bank statement said, adding that it believes Knight Vinke’s “principal points have already been fully addressed.”
 
CalSTRS wrote to HSBC chairman Stephen Green in support of concerns raised previously by fellow shareholder Knight Vinke. The letter from CalSTRS, portions of which were quoted by the U.K.’s Observer newspaper, also criticized Simon Robertson, the bank’s senior independent director, for shrugging off Knight Vinke’s request for a strategic review, claiming that his reaction suggested HSBC’s “complete lack of respect for proper corporate governance.”
 

Before, most large companies had been owned by trusts or families controlled by people like Carnegie, Frick, and Rockefeller. They either ran their companies themselves or hired—and fired—managers to work under their direction. There was no question that the owners were in charge.

Berle and Means pointed out that when ownership passed to millions of anonymous stockholders who bought and sold on a daily basis, the corporation was transformed into a self-perpetuating institution controlled not by the owners, but by the executives. This, they asserted, posed a fundamental governance dilemma: How do investors ensure that executives are working in the best interests of the owners, rather than in their own interests—while at the same time assuring that the company will be managed in the most profitable fashion possible?

This basic issue still animates almost every governance debate we have today, from proxy access and broker voting to director independence and “say on pay.” Activist investors, led primarily by a handful of large pension funds, have been demanding more accountability—i.e., more control—over both corporate managers and directors, on the theory that too many management decisions are made without the best interests of the owners in mind. Executives and board members, backed by powerful voices such as Martin Lipton of Wachtell Lipton, counter that the activists’ remedies go too far and leave companies open to shareholder micromanagement or abuse that could undercut profitability.

Both sides agree with a central premise underlying Berle and Means’ view, that a board’s role is to ensure that the company is run in the best long-term interests of shareholders, says Weil Gotshal & Manges partner Ira Millstein, a pivotal figure in corporate governance who last year helped found a center on the subject at Yale University (See “An Architect of Governance,” page 26). But much of the agreement ends there. “The whole issue under debate all these years has been clarifying the powers of management, the board, and shareholders,” says Richard Koppes, a long-time leader among the activists who served from 1986 to 1996 as deputy executive officer and general counsel at the California Public Employees’ Retirement System (CalPERS). He now is of counsel to Jones Day and advises companies on governance issues.

A California Giant

Although Berle and Means’ concerns have welled up periodically over the decades, today’s shareholder activism really got underway in the early 1980s. It was a time when corporate takeovers were raging and companies were fending off raiders such as T. Boone Pickens and Bass Brothers, a Fort Worth, Texas-based investment firm run by the Bass family. They issued poison pills and paid greenmail, tacking on golden parachutes for top executives in case these defenses failed. Such actions gave rise to charges that entrenched management was putting its own interests ahead of those of stockholders.

One of the strongest responses came from CalPERS, whose status as the country’s largest pension fund made it a major institutional investor. At first, it tried lawsuits, but quickly realized that this wasn’t a cost-effective way to deal with hundreds of companies that had adopted what it considered offensive practices, remembers Robert Carlson, who was CalPERS’ president at the time and remains on its board today.

A better alternative was to try to convince management to act on behalf of long-term investors. That approach would work better if CalPERS could join forces with other pension funds and institutional investors with similar goals. But Carlson and his colleagues quickly found that the Securities and Exchange Commission prohibited such collaborations. So they spent the better part of two years lobbying to get the SEC to change its rule.

They got a big boost when California State Treasurer Jesse Unruh joined the CalPERS board in 1982. A fiery Democratic politician who had dominated the state assembly as its Speaker in the 1960s, Unruh railed against the greenmail that companies such as Texaco were paying out. Once the SEC finally cleared the way, he recruited public pension fund leaders from New York and New Jersey to found the Council of Institutional Investors (CII) in 1985. Today the CII, along with CalPERS, its largest member, is probably the most powerful voice for shareholder activism in the United States. It represents 130 public, labor, and corporate pension funds with collective assets of more than $3 trillion.

The founding of the CII constituted a sharp break in the historical behavior of investors in the United States. Until then, most large institutional stockholders addressed Berle and Means’ dilemma with what’s sometimes called “The Wall Street Walk”: If you don’t like something about a company, sell. This attitude flowed from the same perspective many investors use to make almost every investment decision. If you didn’t like something about a stock—the company’s performance, its industry’s outlook, the new CEO who just came aboard—you take your money elsewhere. In other words, you vote with your feet.

From Passivity, Activism

To fully appreciate why CalPERS and eventually other large pension funds came to be so dogmatic about shareholder activism over the past two decades, it’s important to understand why they came to the conclusion that the Wall Street Walk doesn’t make sense for them.

Oddly enough, their activism flows directly out of the passive investment philosophy to which most adhere. This strategy stems from the economic insights spelled out by Princeton University economics professor Burton Malkiel in a 1973 book called A Random Walk Down Wall Street. Malkiel argued that in an efficient market asset prices will reflect all publicly available information. In other words, you can’t beat the market, at least not unless you have inside information other investors don’t share. Sure, maybe some pros can spot inefficiencies that others haven’t noticed. But on average, over the long haul, most investors won’t outdo market prices.

For pension funds, and really almost every investor, that translates into a passive indexing investment strategy. CalPERS still actively invests some of its funds, but today more than 80 percent of its $240 billion is committed to index funds designed to track the S&P 500 and other market indices.

Passive indexing conflicts head-on with the Wall Street Walk, because it requires investors to be invested in the entire market for the long term. They can’t sell stocks they dislike, no matter what the reason, whether it’s a company headlong in bankruptcy or one whose internal governance is a mess. You don’t buy and sell, you buy and hold.

“So we can’t sell the shares,” long-time CalPERS board member Charles Valdes explained in a 2000 interview about the fund’s history. “What else can we do? We try and fix the problem, which is to get in there and get them to perform better, get the board to look at the CEO, and find out if he and his team are doing what they should be doing: setting up a review committee on salaries, putting in provisions preventing poison pills, greenmail, and all of these other little things that they love to do, or loved to do in the past.”

Still, it took some two decades after the CII’s founding for CalPERS and other activist pension funds to make significant headway. Throughout the early and mid 1980s, they focused on poison pills, ill-advised mergers, and golden parachutes, as well as external governance issues such as South African apartheid. Then in 1987, Millstein gave a speech to CalPERS urging it to focus on corporate boards and the responsibility they have to oversee such actions. This hit like a revelation, prompting the fund to start advancing the case for board oversight of management, a strategy that has become increasingly accepted today.

Proxy Power

That same year the proxy resolution, another major weapon in the activist arsenal, emerged as well. While CalPERS was protesting raiders and greenmailers on the West Coast, the awkwardly named Teachers Insurance and Annuity Association, College Retirement Equities Fund (TIAA-CREF) was searching for ways to take action from its headquarters in New York. Peter Clapman, the general counsel at the time, knew that proxy resolutions long had been used by social activists to protest issues such as companies doing business in apartheid South Africa. But he also knew that such resolutions weren’t usually taken seriously by investors. In fact, most pension funds didn’t even bother to vote their proxies no matter what the subject, leaving companies free to ignore them.

So when TIAA-CREF’s chief investment officer asked Clapman for ideas, he suggested proxy resolutions mostly as a throwaway line, remembers Clapman, who left the fund two years ago to become CEO of Governance for Owners USA Inc., which advises institutional investors on governance issues. Nonetheless, in 1987 Clapman and the chief investment officer filed resolutions at 10 companies with objectionable takeover defenses, including American Cyanamid, International Paper, J.C. Penney, and Pitney Bowes. The first one to come to a vote, at International Paper, lost handily. But the nearly 28 percent yes vote it received was several times higher than what most of the social issue resolutions ever got, sending a powerful message to management that other investors shared TIAA-CREF’s concern.

Since then, proxy resolutions have become a powerful influence in Corporate America. Indeed, companies this year faced hundreds of resolutions on governance issues, including 137 requiring a majority vote to elect directors, 66 having an advisory shareholder vote on executive compensation, and 62 repealing classified boards, according to Institutional Shareholder Services (ISS), the proxy advisory firm.

Today leading pension funds and other activists are still searching for the best governance structure. The scandals at companies such as Enron, Tyco, and Worldcom accelerated the process, leading to the Sarbanes-Oxley Act of 2002 and other new rules requiring greater accountability and disclosure by both management and boards.

CEOs today rarely hand-pick their boards. And most directors are independent of the companies on whose boards they serve. Despite all the changes, though, activists aren’t completely satisfied.

Majority Rules?

Yet the central question posed by Berle and Means has yet to be answered: How should control of the corporation be apportioned among management, the board, and shareholders? Increasingly, activists have come to focus on Millstein’s suggestion that boards should oversee executives more closely, to ensure that they operate the company in the best interests of shareholders.

One method has been the push for majority voting for directors. In the past year or two, more than 300 companies have adopted such procedures, which typically require the resignation of a board member who does not receive at least 50 percent support from shareholders when up for election. Advocates want the idea to be standard procedure at every company. Majority vote is ultimately the best weapon for shareholders. “If every large company had majority voting, a lot of the governance problems we see would be ameliorated,” says Clapman.

He and other shareholder advocates also have been prodding the SEC to issue rules to allow shareholders to change corporate bylaws governing the election of board members. The move has sharply divided activists and business groups. At the latter’s urging, the two GOP members of the commission passed a proposal in August that would disallow any election-related changes by shareholders. The two Democratic appointees voted for a proposal that backs the activists. It would allow shareholders with a 5 percent stake to put election-related bylaw changes on a company’s proxy. SEC Chairman Christopher Cox voted for both proposals and their outcomes remain unclear.

Shareholder advocates such as Koppes think the United States should go further and adopt a system like that in Britain. There, just 10 percent of shareholders can call an extraordinary general meeting at which a majority of stockholders can remove any or all directors for any reason (assuming there’s a quorum at the meeting). Even though British shareholders rarely use their power to eject boards, their ability to do so makes both directors and executives more responsive to their interests, says Robert Monks, a long-time U.S. governance advocate who founded ISS, The Corporate Library, and other governance advocacy institutions.

Another approach shareholder groups have taken is to insist that the chair of a company’s board be someone other than the CEO, to set up a structure that drives home the point that management reports to an independent board. Currently less than a fifth of large companies split the two positions, and often only temporarily, to allow a retiring CEO to stick around and give guidance to a succecssor for a year or two. “We’ve still got a long way to go” to achieve the right balance of power in the corporate governance structure,” says CalPERS’ Carlson. “Many large companies have gotten the message and know they need truly independent boards, but they still have to start walking the walk. And a lot of smaller and midcap companies haven’t even gotten the message yet.”

Finding a Balance

Of course, many executives and business groups disagree with his assessment. While some companies have acquiesced to demands for majority voting for directors and separate chair and CEO posts, much of the business community sees no need for new SEC rules or other major changes.

Groups such as the Business Roundtable and the U.S. Chamber of Commerce argue that giving shareholders too much power could backfire. If new rules allow some shareholders to exert undue influence over director elections, for example, they could benefit at the majority’s expense.

Besides, points out Lipton and others, shareholders are a heterogeneous bunch with diverse interests. Some have short-term investment horizons and would be happy to see a company boost profits and the stock price today, even if it threatened its long-term prospects. Pension funds and others with a multi-year strategy want just the opposite. “We should defer to the board to reconcile these interests, along with all the other constituents of a company such as employees, suppliers, and the communities in which they operate,” says Lipton.

While most activists disagree with Lipton’s conclusion that the status quo governance system works just fine, some do agree that their demands for greater shareholder rights shouldn’t obscure the goals of a corporation in the first place, namely, to provide goods and services as efficiently and profitably as possible. “The board’s job is to pick great CEOs and then let him operate,” says Millstein. “Boards need to be able to remove the CEO, to not overpay him, and to get him to focus on performance. But those are externals to the real job of a company, which is to perform. That’s the CEO’s job, not the job of the board.”