Economy's Woes Loom Large This Proxy Season

The old saw "it's the economy, stupid" is a battle cry among shareholders that may become the national anthem of the 2008 proxy season. Shareholders faced with disappointing returns are, of course, more likely to become activists than the happy investors of good times. Take, for example, the shake-up at Circuit City Stores Inc., one of many retailers hurt by the consumer spending decline. The Wall Street Journal reported that a Colorado-based investment fund launched a proxy fight to remove the company's board and elect five directors to boost the company's turnaround prospects and hopefully increase its stock price. The fund holds only a small stake (6.5 percent) in the company.

As more and more companies post losses, management shake-ups in firms representing all industry sectors will grab headlines -- including those where investors perceive abuses in executive compensation. According to Mercer, management decisions relating to executive compensation will be top of mind for shareholders in financially deteriorating companies this proxy season. Mercer reports that many companies have recently made or are currently planning major adjustments to their business model and realigning compensation accordingly -- a daunting process compounded by confusion over SEC disclosure requirements.

Taking such proactive steps to avoid shareholder proxy resolutions represents a governance sea change. Academic studies of the past have shown that even when a proxy resolution wins a majority of the vote, most companies tend to ignore them. But a recent Harvard Business School shareholder resolution study shows that in 2003-2004, companies adopted more than 40 percent of proposals that obtained a majority shareholder vote. According to the study, proposals to stop anti-takeover measures and confidential shareholder voting were most likely to be adopted.

Shareholder advocacy groups are recommending that managements hold on to their hats -- it's going to be a bumpy ride as the 2008 proxy season progresses.