Shareholder activism

Responding to or Simply Staying Ahead of Shareholder Activism... 

Case Study in Shareholder Activism—the Sisters of St. Francis... 

Initially the reaction by Amoco was similar to the hostile reactions of companies in the early days of shareholder activism. The Valdez principles were considered an unwelcomed, nndesirable, and unwarranted intrusion into corporate affairs by an external gronp that has developed principles outside of the sphere of corporate influence and were even seen as a legal threat. Despite this resistance, the proposal achieved 8.6% approval at the annual meeting and thus triggering eligibility for reconsideration at snbseqnent annnal meetings. 

From an overall economic viewpoint, any investment proposal may be considered as an activity which initially absorbs funds and later generates money. The funds may be raised from loan capital or from shareholders capital, and the net (after tax and costs) money generated may be used to repay interest on loans and loan capital, with the balance being due to the shareholders. The shareholders profit can either be paid out as dividends, or reinvested in the company to fund the existing venture or new ventures. The following diagram indicates the overall flow of funds for a proposed project. The detailed cash movements are contained within the box labelled the project . 

It can play one of two roles. First, as an end in itself or as an alternative or adjunct to profitability and shareholder equity, or, second, as an intermediate objective leading to one of these more fundamental outcomes. If we examine the first of these alternatives we see a range of theories that have subordinated profitability to other variables as primary outcomes. For example, research in the economic theory of commercial banking modifies the basic economic goal of profitability to include a superordinate need for liquidity (Cooper, 1949), and Margolis (1958) argues that the context of uncertainty in which business activities are conducted will lead so-called deliberative firms to utilize criteria that they believe will lead to profitability in this... 

But even the Scotts company, a dominant firm in lawn care chemicals and services, insists in its own messages to shareholders and consumers that beautiful lawns don t just happen. To make this landscape normal, as we shall see, requires repeated representation both of the aesthetic ideal and the enormous battery of consumer goods and services that make it possible. This closely echoes the thinking of geographer Don Mitchell, who observes that distinct, meaningful, cultural objects like the modern lawn are actively that culture is not... 

The other side of the situation analysis though is the real world. Here, competitors will be moving independently of the company s internal concerns and it is by looking at the activities of these competitors and at the market itself that opportunities will be revealed. The results of the company s performance must generate improvements in turnover or profit for its shareholders, but to remain attractive as a continuing investment these improvements will also need to be reflected in comparable or better growth than national or international competitors. 

To begin with, though the percentage of overall economic activity accounted for by the industry continues to shrink - in the United States, down from four percent to less than two percent over the past 25 years - shareholder returns were roughly on a par with those of the broad market indexes in the United States and Europe over the same period. In the United States, for example, both the chemical industry and the broad market returned roughly thirteen percent a year to shareholders,3 a more robust rate than that of other asset-heavy mature industries, such as steel, automotive, and pulp and paper. This is certainly quite an accomplishment. 

We therefore chose to examine the performance of chemical companies in relation to some easily measurable dimensions of their corporate activity - such as product portfolio, scale, geography, market position, and product focus. By classifying companies this way, we were able to test a number of hypotheses about what drives the creation of value, measured by total return to shareholders (TRS), market-to-book value, and pre-tax return on invested capital (ROIC). Data from the last full commodity cycle (1992 to 2003) generated surprising insights.5 ... 

To start a business, one needs to acquire assets. Financing activities to acquire assets involve obtaining funds from owners and creditors (i.e., banks). When owners fund the activities of a corporation, they become shareholders of the corporation. Shareholders have a claim... 

It can hardly be denied that shareholders seek profits. It is an open question as to whether they have motivations other than profits. In recent times, there has been an emergence of an ethical investment sector, where managed funds pursue profits in conjunction with additional ethical objectives, such as environmental protection. These additional objectives are often satisfied simply by placing constraints on the types of firms these Hinds will invest in. On other occasions, the fiind is a more active participant in guiding firm policies. Even so, however, the question of most interest in the popular press is whether the ethical sector is more or less profitable than other sectors. In short, the focus is still squarely on profits, and it is safe to proceed on the assumption that shareholders seek profit maximization (see Baumol, 1958 Jensen and Murphy, 1988 Murphy, 1985). 

Shareholder value In this most recent phase the main focus is on financial returns, that is on the value created for investors. M A activity in the industry is widespread but disaggregation is also a feature of the corporate landscape as more and more firms choose to focus on a smaller number of fields. The need for value creation imposed by capital markets is forcing Western chemical players to take action, which is sometimes quite painful. They have had to fundamentally rethink their strategies and ways of doing business. In particular, the process of building new businesses outside the traditional scope of activities has provided an opportunity to crack the growth challenge (see also Chapter 3). 

In the Future 500 stakeholder engagement schema, the corporate or shareholder stakeholder terrain is at the center of the sphere. The heart of any corporation is its mission and values, its policies and procedures for doing business, and its value proposition - that is, what product or service is being creating. A company s cultural values and ways of doing business are created in this terrain. A company s culture emanates from this center and little can be done to transform activities in the outer layers if there is no alignment with what exists at the heart of the stakeholder framework. Primary stakeholders in this terrain include the executive management team, the board of directors, and all shareholders. 

Because of stock price, for starters. The link between shareholder value and environmental and social performance is a phenomenon that has spawned a large body of research, literature, and investment activity in recent years. Insurers claim that in the next decade, the annual cost of global warming will rise to 150 billion a year (Webber, 2002). The stakes are increasing as multinationals in the finance community band together to buttress their arguments for sustainability... 

The key question asked by companies considering pursuit of sustainability practices is what is the business case - a profit or shareholder value case - that can create justification for allocating resources and the attention of corporate boards and executives. As was written in Walking the Talk (Holliday et al., 2002), companies tend to get involved in activities long before they can prove the business case for doing so. 

As the world s leading chemical company, it is our mission to benefit our customers, our shareholders, our company, our employees, and the countries in which we operate. BASF s values describe the orientation and the manner in which we want to reach our goals. The first of six values states Ongoing profitable performance in the sense of Sustainable Development is the basic requirement for all our activities. We are committed to the interests of our customers, shareholders and employees and assume a responsibility towards society. ... 

Today, employees and shareholders increasingly view sustainability as a primary consideration in the company s key functions - product development, manufacturing, human resource activities and community involvement - because it is the right thing and because it makes business sense. 

---