Pensions & Investments Online
by Barry B. Burr
DECEMBER 26, 2005

James Peck might now be called the Rosa Parks of the shareholder activism movement. Instead he is hailed as the “first militant social issue shareholder activist.”

In 1948, Mr. Peck bought a share of Greyhound Corp. stock in order to raise with management “the issue of integrating bus seating in the South.” Mr. Peck, a member of the Congress for Racial Equity, “subsequently engaged in a multiyear (albeit unsuccessful) battle with the company (including proceedings before the Securities and Exchange Commission and the courts) on the issue because of his belief that ‘segregation was a bottom line issue’ because ‘customers who experienced segregation would institute expensive lawsuits against the company.’”

Jay W. Eisenhofer and Michael J. Barry recount this early episode in shareholder activism in a chapter in their “Shareholder Activism Handbook,” newly published by Aspen Publishers Inc., Frederick, Md.

While history provides constructive lessons, the book’s primary mission serves as a tool to direct shareholders to become more active in corporate governance issues, providing guidance on areas from initiating proxy strategies to class-action suits. Messrs. Eisenhofer and Barry - respectively a managing partner and a partner at Grant & Eisenhofer, a securities litigation law firm - chart the legal rights of shareholders in corporate governance matters, mergers and acquisitions, and securities litigation.

Along with other aspects, their book outlines how shareholders can develop a corporate governance program and whether it pays; how shareholders can communicate with other shareholders; and the process for bringing securities litigation, taking part in a class action and filing settlement claims.

The book is readable and engaging, and is replete with real examples and detailed footnotes of research in its discussion of current law and strategies. The authors place issues into context by relating the evolution of the law, regulation and practices on the rights and responsibilities of shareholders and corporate management.

The book discusses the evolving status of the balance of power between shareholders and management, as well as the evolution of federal and state law and court rulings pertaining to corporations and shareholders, including discussion of the mandates and impact of Securities and Exchange Commission regulation and the Sarbanes-Oxley corporate reform act of 2002.

“A central part of a successful corporate governance program is the ability to engage corporate management in a dialogue regarding important” shareholder concern, Messrs. Eisenhofer and Barry write. The authors point out while an SEC regulation in 2004 provides a means of such communication, state statutes cover the substance of communication, including defamation. “Corporations are ... afforded rights similar to individuals” in defamation law, the authors write. In one of several examples, they recount a case filed in 2004 when Cintas Corp. sued in a U.S. District Court a shareholder, Walden Asset Management, and one of its officers, regarding an allegation about sweatshops. The court never ruled on the case because the parties reached a non-monetary settlement later that year. But as the book suggests, activism can have potentially unquantifiable risks that can deter institutional investors from involvement.

Whether shareholder activism pays has to be the central focus of fiduciaries in decisions on engagement. Messrs. Eisenhofer and Barry cite a number of academic studies showing good governance correlates to better shareholder value. For further motivation, the authors apply a principle stated by President Kennedy, obviously applicable to governmental policies: “There are risks and costs to action. But they are far less than the long-range risks of comfortable inaction.”