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A Very Busy Season for Shareholder Activists

It is shaping up as a very busy season for shareholder activism, in part because of investor disgust with the lack of management oversight of lending practices that led to the current sub prime and credit crisis.

So far this year, shareholders have put forward 1,106 proposals for company meetings, according press reports. That is nearly as many as the 1,164 proposals filed in all of last year and doesn't include proxy fights over board seats. As for proxy battles, there is action aplenty. In the first quarter, about 50 battles were announced. That is 10 more than last year's first quarter and 18 more than in the first quarter of 2006.

Shareholder activism got a big revival after the Enron and WorldCom debacles of the late 1990s. Many analysts had expected to see the fervor cool off, especially after Sarbanes-Oxley forced stricter internal reviews. Then the sub prime mess and related financial crisis stoked concerns anew, as the figures demonstrate.

Indeed, according to RiskMetrics Group, ineffective risk management by corporations with sub prime exposure, plus a lack of adequate regulation, are considered to be key causes of the lending mess, a RiskMetrics survey of investors shows. After checking the governance structures of 11 financial institutions, RiskMetrics' analysts found that having a combined CEO and chairman contributed to management failures. Shareholder activists are now likely to push harder to separate the two leadership roles.

Another practice likely to come under attack during this latest bout of activism involves staggered board terms. The practice had been thought to blunt unwelcome takeovers and provide stability, but institutional investor groups want the practice ended because they believe it helps incompetent managements maintain the status quo.

My take: as painful as such shareholder assaults can be for CEOs, they are nonetheless healthy because they promote transparency and democracy. Too many CEOs are overweening egoists. When they are brought to heel, everyone benefits. Splitting chairman from CEO roles and holding directors accountable all at once help to this end.