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Companies starting to listen to shareholder activists

Published February 20, 2007


Shareholder activists are used to making noise, but not necessarily to being heard by corporate America. This year companies may begin to listen.

A surprising trend at the start of the proxy season is that companies like Applebee's, Aflac and Home Depot are doing what they can to avoid public fights with investor groups targeting them on issues such as executive pay and board elections.

That doesn't mean all corporate chieftains are going to buckle to investors' demands, but many certainly seem more willing to engage in dialogue and quash potential controversy as quickly they can.

Investor demands have become more difficult for companies to ignore, especially since investors have not only stepped up their proxy fights in recent years, but they've been winning their battles more frequently.

Of the 91 shareholder proxy initiatives for board seats in 2006 at U.S. public companies, at least one dissident gained a seat 44 times. That's a 48 percent success rate, up from a 40 percent rate in 2005, according to When including all victories such as the removal of directors, merger votes and enhanced corporate governance, the rate climbs to 59 percent.

Companies may be realizing that by dealing with shareholder issues sooner rather than later, they can potentially cut down on the time, money and effort needed to fight investors' proposals that they ultimately might not win.

In recent months, casual dining chain Applebee's International Inc. has faced a public flogging by investor Richard Breeden, whose firm, Breeden Partners LP, owns about 5 percent of Applebee's stock.

Breeden stepped up his attack in late January in a letter sent to the chairman of Applebee's board compensation committee in which he called the company's compensation system "pay without performance" and cited what he deemed "unhealthy" practices.

Applebee's didn't let the attack go on for long. Last week, the company made the surprise announcement that its board is considering "strategic alternatives," including possibly selling the restaurant chain or taking on more debt to fund a one-time payout to shareholders. Its shares jumped almost 9 percent.

"Our immediate reaction is one of surprise that the long-term course of this company could be altered by pressure from a relatively small activist shareholder," said Bear Stearns analyst Joseph Buckley.

But the success of this proxy season won't come by looking at what did or didn't make it onto corporate ballots. It will best be gauged by what victories led to meaningful change.

[Last modified February 20, 2007, 01:15:30]

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