The new face of activism

Eric Jackson was annoyed. As a minor Yahoo shareholder in 2006, he felt like he was ‘watching a train wreck as an outsider,’ which caused him to wonder ‘why no activist hedge funds or [other] shareholders were stepping forward to get this company back on track.’ When a December 2006 reorganization failed to help Yahoo gain traction against its competitor, Google, Jackson decided to use his blog to vent his frustration with the company and present what he called his Plan B, which was a nine-point strategy for the company’s success.

Word of his ideas spread quickly online. Wikipedia’s for-profit arm invited Jackson to post his plan as a wiki, an online post that can be edited by readers, so other investors could add their input. Then he turned to multimedia outlets and presented his plan in a series of YouTube videos. He launched a group on social networking website Facebook and posted Yahoo related photos on photo sharing website Flickr.

That’s when the print media began to take notice. Jackson says he fielded calls from The New York Times, Red Herring and Dow Jones regarding his use of online social media to air his concerns about the company. That publicity turned Jackson into a professional activist. ‘I started getting emails from people saying things like, Hi. My name is Joe Smith. I’m from Nebraska and I have 50 shares I’d like to pledge,’ he recalls. ‘I had an Excel spreadsheet and I was spending so much time typing names and pledges in.’

Today, Jackson represents approximately 150 shareholders who own 3.2 million shares of Yahoo stock. He has met with Yahoo’s corporate secretary Michael Callahan, now-president Sue Decker and other company officials. He is a fixture at shareholder meetings, where he represents the interests of his pledged investors. His campaign was widely credited as influential in the June 2007 ouster of former Yahoo CEO Terry Semel. And in an encore last year, Jackson conducted a successful shareholder-advocacy program against Motorola.

Opening up access

From proxy battles to organizing shareholder groups to disseminating information from annual meetings, the internet is evolving as a forum for information exchange in shareholder relations and corporate governance. That in itself is not necessarily news. Those with long (by internet standards) memories will recall the fits of pique often escalating to vitriol and personal attacks on corporate executives and fellow posters alike that marked posts that appeared on the Yahoo! Finance message boards at the height of the dot-com fury. There was even a case as far back as 1999 in which shareholders in Dallas-based Coho Energy engaged in an online campaign to solicit proxies from shareholders who sought chairman and CEO Jeffrey Clarke’s ouster.

Looking back on those events, JD Davis, instigator of the Coho action, says that although the company’s bankruptcy derailed his campaign, ‘I wish that more folks would become more active in using online services to hold corporate management to task.’ Until recently, however, online outlets have proven more effective at generating massive amounts of venting than as fertile grounds for organizing revolt and effecting change.

The role of the web might now be poised for change as more shareholders grasp the idea that it can be a tool for something more substantive than public complaining. ‘The internet allows shareholders to unite on topics and get on issues involving management without having to have huge financial stakes,’ says avid blogger Zac Bissonnette, a writer and editor for AOL Money & Finance. That makes it ‘cheaper to do all kinds of activism,’ he says. ‘By lowering the barriers to entry, it lets people get ideas out there.’ 

Bissonnette’s experience, like Jackson’s, is that larger shareholders, mainstream journalists, analysts, hedge-fund managers and company executives will pay attention. A minor shareholder in Adams Golf, he devoted one blog post to questioning why the company’s retired non-executive chairman was pocketing an annual salary of $400,000. ‘I wrote, Wow, they’re paying all this money to this retired guy who spends all his time fishing.’ The CFO called him in response to say he thought the comment mischaracterized the situation. But when Bissonnette last checked the proxy statement, he found that Adams had cut that paycheck by $100,000: ‘So I think they do hear shareholders complaining.’

For small shareholders who until recently would have been relegated to the sidelines, that’s heady stuff, and just getting into the game is half the fun. ‘Was I confrontational? A little bit,’ Bissonnette acknowledges. ‘But I did it mainly in the spirit of fun. To me, what makes the activism stuff compelling is there’s an element of human drama there. It’s fun. It’s exciting. There’s conflict.’ And that conflict, long a staple of online discussion boards, is now being recognized as a potential agent for change.

Social media in particular offer opportunities for both shareholders and companies to share their ideas and gather support for them. These outlets come in many varieties, ranging from blogs, message boards, chat rooms and wikis to popular networking websites including Facebook and MySpace (see the box on page 17). These types of websites offer users the ability to post profile pages and launch interest-specific groups, while YouTube and Flickr allow users to post video content and photographs, respectively, and to share comments on them.

Shareholder activism websites have also begun cropping up. ProxyDemocracy.org is an online warehouse of agendas and institutional investor votes presented in a fully searchable format for 12,201 shareholder meetings taking place between July 1, 2003 and July 31, 2008. The website, which identifies itself as a fiscally sponsored project of RSF Social Finance and is directed by Harvard University government doctoral student Andy Eggers, serves to educate shareholders about voting procedures, proxies and corporate agendas.

Numbers game

Part of the reason this is an emerging trend is that the technology has come into its own. No longer the domain of angst-ridden teens, social media are attracting vast audiences of tech-savvy, demographically diverse people. Blog information center Technorati says that it tracks nearly 113 million blogs. Last year, after Facebook opened its registration to everyone — compared to its previous policy of allowing only a valid email address from a university or a selected group of secondary schools and businesses — monthly visitors grew 89 percent to 26.6 million. Also in 2007, the Pew Internet & American Life Project found that 48 percent of internet users said they had visited a video sharing website such as YouTube.

‘The thing that users love about social networking is you no longer have a lot of the rules and structure. It makes it easier to share information,’ says John Head, director of enterprise collaboration at PSC Group, which uses software to help companies ‘implement their own social networking strategy.’

‘In a world where information has to be controlled, it causes quite a few problems,’ Head adds. ‘So what we’re seeing is companies trying as fast as possible to embrace blogs, wikis, everything else that’s social networking, but trying to do it in a way that protects their information and separates that public and private information.’

The sheer volume of people using social networking tools makes them effective for shareholder communications as well as to unite shareholders for common causes. Jackson is a good example of that. Brian Hunter is another — not the Brian Hunter of Amaranth’s natural gas speculation debacle but another Hunter in Calgary, an oil and gas engineer. He launched a Facebook group after nearly $750,000 of his savings, which had been parked in asset-backed commercial paper, was frozen.

‘[Investment advisory firm] Canaccord Capital decided that this was a safe short-term investment. They infected 1,400 of their accounts with it, mostly folks that were savers: retirees, widows, people who put their life savings there,’ says Hunter.

Initially, Hunter had joined Facebook to ‘keep tabs’ on his adult children, who had settled across Canada and used the medium to communicate. But after the steep decline of his shareholdings he put up a Facebook page and launched a group out of frustration over having a sizeable portion of his assets frozen through no fault of his own. Little did he know that he had provided a forum for other angry investors in the same situation to congregate, share ideas and gather strength in numbers, he says. Ultimately, the Facebook website gave him connections around Canada that allowed his group to lobby and apply pressure to Canaccord, helping to influence the company’s decision to buy back the frozen paper of more than 1,400 individual investors. Of the over 300 people in the room at the meeting where the decision was made, Hunter estimates that fully a third were members of his Facebook group.

‘The internet allows shareholders to unite on topics and [comment] on issues involving management without having to have huge financial stakes,’ says Bissonnette. He added that internet technology is making it less expensive to initiate and conduct a proxy fight. So he sees the internet as contributing to the democratization of the proxy process.

Playing by the rules

Companies that want to be positioned at the crest of this wave need to keep track not only of technological advances, but also of the changing SEC postures toward those advances. Recent developments include amendments to proxy rules that went through in March 2007 and new rules regarding electronic shareholder forums, which came into effect in February 2008 (see the box below).

These moves make it clear that the SEC wants to facilitate the use of social networking forums for communication. It actually stated the desire to ‘strongly encourage their use,’ says Brendan Radigan, a partner with law firm Edwards, Angell, Palmer & Dodge’s Providence, RI office. However, as a securities lawyer, Radigan has more than a few areas of concern. ‘If you’re an IR official or an executive looking to launch one of these forums, this new set of rules expressly states that they do not alter application of federal securities laws.’ Therefore, he elaborates, the application of fair disclosure regulations, which prohibit the selective disclosure of material non-public information, might put the company at increased risk for violation by inadvertently disclosing information through the engagement with shareholders, analysts and journalists online.

One possible solution is for companies to establish their own shareholder forums within the investor relations sections of their websites. Among the early adopters of this approach is Amerco, the parent company of U-Haul, which has also adopted the e-proxy process in an attempt to increase shareholder participation. Director of investor relations Jennifer Flachman says Amerco also anticipates the move will ‘support the company’s sustainability initiatives’ by reducing expenses related to the proxy process.

Flachman says the company ‘encouraged stockholders to vote and submit their proxy via the internet [and] to attend the annual meeting via webcast.’ Describing what exactly is offered to interested parties, she adds, ‘During the webcast stockholders had the opportunity to ask questions of, and communicate with, members of our management team. We initiated a shareholder forum prior to our proxy process in 2007 to provide a medium where shareholders could ask questions and post comments about the materials in the proxy.’

Although that initial forum experiment generated ‘very modest participation,’ Flachman remains enthusiastic about its future use and popularity. ‘In the past, the general view has been that professionals tend not to post to forums. We’d like to change that view and see our investor forum as an opportunity for participants to discuss company issues that pertain to financials. We also see this as an opportunity to define issues,’ she says.

‘It’s fabulous to do that. Everyone should do that,’ Bissonnette comments. ‘If you make it clear that you want to hear from shareholders, you can keep it from being adversarial. I think every company ought to have a shareholder forum. I think every company should encourage communication between their shareholders and with their shareholders.’

Head agrees. He believes a greater number of companies are going to see the practical value of bringing this technology in-house and onto their own websites because on the existing social networking websites, ‘there’s zero control that a company can have except calling a lawyer. … I think the companies that are really successful are the ones who are going to say, This is what shareholders are doing today. Let’s give them a way to do their communications, and let’s support them, but let’s get it out of these public networks.’