Financial reforms give teeth to investor activists

Southern California-based John Chevedden, photographed after attending a Northrop Grumman shareholder meeting in Redondo Beach in May, has also taken on the likes of Edison International, McDonald’s and energy firm Apache Corp.

NEW YORK -- Edison International last spring allowed its shareholders for the first time to vote on the compensation of the utility giant's executives. It was a sweet victory for investor activist John Chevedden.

Working out of his Redondo Beach condo, the retired engineer had put forward a resolution calling for such "say on pay" votes at Southern California Edison's parent company. The nonbinding proposal won the support of a majority of shareholders, setting the stage for management's change of heart this year.

But Chevedden still showed up at the firm's annual meeting in April in San Gabriel to make sure everything went as planned.

"You can't let up on the last lap," he said.

Chevedden and his East Coast counterpart, Ken Steiner, have been racking up many such victories lately. They are the unofficial leaders of a collection of shareholder activists who were long viewed by corporate America as merely annoying idealists whose resolutions rarely won many votes. But they have found themselves riding a populist wave set off by the financial crisis.

A crowning success of sorts came last month with the enactment of the federal financial reform law, which gives shareholders of every U.S. company a say on pay at least once every three years. The law also requires firms to "claw back" executive bonuses based on corporate earnings that turn out to be illusory.

"Those things would never have been in the bill had they not been raised in the public consciousness by shareholder activists," said Steiner, who followed his father into the corporate activism field.

In recent years, some unions and public pension funds, including the California Public Employees' Retirement System, have joined the campaign, bringing more resources to the battle for shareholder rights.

In a milestone last year, Bank of America Corp.'s chief executive was forced to step down as chairman by a shareholder vote on a union-initiated resolution. But the movement grew out of the efforts of a scrappy few.

"It's the idea that the individual can make a difference," said Charles Elson, a University of Delaware law professor and expert on corporate governance. "That's what they proved."

Chevedden, 64, attended his first annual meeting in the 1960s when Douglas Aircraft shareholders met in Beverly Hills, Calif.

Steiner, 44, a private investor, lives on New York's Long Island. They have never met in person. But for about a decade they have consulted regularly in their mutual campaign to reform corporate America by making it more transparent, democratic and resistant to runaway executive compensation.

At Citigroup Inc.'s meeting last year, when several directors did not stand for re-election, Steiner, who attends such events carrying a worn leather suitcase and handwritten note cards, stood up and said the rest of the board should resign.

This year, after more directors stepped down, he took the microphone and said, "Leaving is the first good thing they've done in managing this company."

Such moments in the spotlight are rare. Steiner and Chevedden spend much of their time writing formulaic letters and researching corporate bylaws.

Even their successful resolutions can be less than headline-grabbing.

For example, at McDonald's Corp. this year, Chevedden won 71 percent of the vote on a proposal requiring that directors up for election receive the votes of a majority of the company's shares, not just a plurality.

But in an apparent sign of their influence, Apache Corp., an energy company in Houston, took the unprecedented step this year of suing Chevedden to keep his resolution off the company's ballot.

Chevedden called the suit "counterproductive because it sends a message that these things really are powerful."

Apache declined to comment. But executives at many companies are said to be frustrated by the unending stream of proposals from individual activists.

This year Chevedden alone proposed resolutions pertaining to 52 companies, while Steiner offered 28 resolutions and helped his father file 32.

"They have polluted the shareholder proposal process," said Amy Goodman, a lawyer in the Washington office of Los Angeles-based Gibson Dunn & Crutcher who has helped some companies challenge resolutions brought by Steiner and Chevedden.

And even some activists at unions and pension funds acknowledge that the pair don't always respond constructively to efforts by companies to start a dialogue.

But their institutional allies say that tendency is outweighed by the spade work Steiner and Chevedden do on issues no one else is paying attention to.

"They are often referred to as gadflies," said Nell Minow, a corporate governance advocate at research firm Corporate Library. "But it's important to remember that gadflies do get the animal to move."

The movement traces its roots to the 1930s, when shareholders of U.S. companies were given the right to make proposals with the creation of the Securities and Exchange Commission.

An early activist, Wilma Soss, was the inspiration for the stage and movie musical "The Solid Gold Cadillac," which celebrated her antics in standing up to executives.

Still, when Steiner's father, William, began proposing shareholder resolutions in the 1980s, he and activists like him were seen as relatively impotent, one of them even took to wearing a clown's nose, and companies easily convinced big-time investors such as pension funds and hedge funds to vote against them.

One of the first shareholder resolutions to win a majority vote was offered by the elder Steiner in the 1990s in a campaign to stop giving pensions to corporate directors, a practice now largely extinct. He moved from there to push for more independent boards of directors, less at the beck and call of the paid executives.

The movement's progress over the decades can be seen as both significant and incremental.

"I'm under no illusions that the executives are any less powerful or influential because of what I do," Ken Steiner said. "But I think that by getting so many votes behind me, it elevates my status to where I can at least push them a little bit in the right direction."

The new federal provisions on executive pay will make unnecessary some of the work Chevedden and Steiner have been doing, but they don't plan to stop.

"There are plenty of issues still out there," Steiner said. "There's been a lot of progress, but there's still a lot to do."