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The New Corporate Raiders

If you want something done right, you have to do it yourself. It’s true at home and, as some are finding out, it’s just as true in business. So, tired of waiting for a political action hero to take up their cause, ticked off investors have found an unlikely champion: themselves. That’s right. The little guys have reached the breaking point and are taking matters into their own hands—stepping into the breach with the one-two punch of proxy resolutions and lawsuits. Corporate evildoers beware.

The confrontational mood promises to make the approaching run of annual shareholder meetings a radical departure from the corporate love fests of the past, and the most entertaining spring spectacle around now that the networks have blown their reality wad on February sweeps. A storm is brewing, patience is at an end, war looks inevitable, and it has nothing to do with Saddam.

All across corporate America, CEOs and board members are steeling themselves for hostile debate on a record number of proxy resolutions, the vast majority of which demand change on corporate governance issues. And it’s no coincidence that among the reforms shareholders are seeking are three key concerns the Sarbanes-Oxley Corporate Responsibility Act failed to address: bloated executive compensation packages, the pervasive use of offshore tax havens, and the continuing refusal to expense stock options or link them to performance.

These are messy matters corporate chieftains would much rather handle behind closed—or, even better, locked and barricaded—boardroom doors. No wonder Richard Sykes, the former chairman of drug giant GlaxoSmithKline—a company whose shareholders last year blocked an attempt to double the already hefty pay package of his successor—said earlier this month that small shareholders ought to be barred from annual shareholder meetings on the grounds that their input was disruptive and a waste of time. Imagine the nerve of those small-fries, disturbing Sykes’ piece of mind just because they don’t want to have their nest eggs looted.

Perhaps he’s just afraid that the next resolution those annoying Glaxo shareholders might offer is one barring the company from aggressively marketing a product even after executives are shown evidence that it’s killing people. Let’s hope they do, since newly uncovered documents indicate that this was exactly what happened with Baycol, the anti-cholesterol drug that Glaxo and Bayer partnered on before too many bodies began piling up and it was yanked from the market.

Thankfully, it’s not just small investors with scrambled nest eggs who are pushing for change. Powerful union and state pension funds are also finally starting to play hardball, with encouraging—if limited—results. Last week, for instance, GE, facing union-backed resolutions, agreed to stop inflating the pay of senior executives by including pension-fund income in its calculations. And last year Coca-Cola made changes to its supplemental retirement plan rather than contend with a proposed AFL-CIO resolution.

The other smart bomb being wielded in the battle to hold corporate America accountable is litigation. Tens of thousands of irate investors have filed suit—individually and collectively—against a wide array of scandal-plagued companies, investment banks, and the high-profile individuals who run them (often, into the ground).

Among those being hauled into court is Citigroup, which has managed to pull off a rare defendant’s hat trick. Not only is the banking behemoth the target of shareholder lawsuits for helping prop up Enron and WorldCom, it is also being sued for falsely inflating the value of a host of tech stocks in an effort to land more business for its investment banking division. Plus, onetime Citigroup big shot Jack Grubman is facing the legal wrath of investors for providing misleading stock ratings. Not exactly the kind of synergy we were promised when the feds allowed these giant conglomerates.

And Citigroup isn’t the only Wall Street bastion under attack: A federal judge ruled last week that a massive class action lawsuit targeting 55 investment banks that allegedly manipulated the IPO market in the late ’90s could proceed. The ruling will force the banks to open their files to shareholder lawyers, meaning we could be treated to another round of damning—not to mention highly entertaining—e-mails. To keep their dirty laundry safely in the bag, the banks—including Goldman Sachs and Merrill Lynch—will likely agree to a settlement.

But even taken collectively, the proxy resolutions and the lawsuits are not enough to change fundamentally the way corporate America operates. The vast majority of proxy resolutions are nonbinding, which means company execs can disregard the ones they don’t like—and they don’t like most of them. And, when all is said and done—when all the appeals have been exhausted, and the legal fees deducted—even successful lawsuits usually end up returning only pennies on the dollar to ripped-off investors. That doesn’t make them meaningless endeavors, however. Far from it, because they place corporate leaders on the hot seat and in the public spotlight—two of the last places embattled execs want to be right now. Good old-fashioned bad publicity, and the shame that comes with it, is still a powerful force to be reckoned with.

So here is my advice. If shareholders are really looking to seize the moment and capture the backing of the largest possible body of supporters, namely taxpayers, they should focus their outrage on an issue with deservedly broad consensus: offshore tax havens. At a time of soaring deficits, corporations continue to cheat the government, and the public, out of billions of dollars a year while the rest of us dig deep to make up the difference. It is the kind of issue that not only epitomizes the unfairness of the current system, it will also stick in people’s throats. Especially between now and April 15.

Average Americans may yet roar loud enough to take back the power from their corporate overlords. My patience has run out. Let the war begin.

—Arianna Huffington


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