Bylaw changes: A new weapon for shareholder activists

Shareholder activism has traditionally taken the route of shareholder resolutions in general meetings. For example, CalPERS, the largest public pension fund in the country has long been one of the most activist institutional shareholders. CalPERS selected firms for activism based on their corporate governance structure and antitakeover provisions (in 1987 and 1988), and later based on their stock price performance(1989 to 1993). The CalPERS investment committee then identifies companies that it will target for a shareholder resolution in a company meeting.

One problem with shareholder resolutions is that they are often nonbinding on the company, even if they are passed by a majority vote. The SEC's rule 14A-8 or the 'shareholder proposal rule' established in 1942 allows shareholders to make proposals to change corporate governance structures which can be voted on. Under relevant state law however, these proposals are 'advisory' and need not be binding.

If management are not bound to implement these proposals, whats an activist shareholder to do?
Enter a new tool : bylaw changes. Bylaws are rules governing a company's internal affairs and can be changed by shareholder voting. The rules governing bylaw changes are not uniform, however. They may vary by state, since state laws typically specify certain bylaws that may be changed by shareholder vote (much of the power to determine bylaws however, may still rest with the board).
The WSJ today has an article about 8 companies that have been targeted for bylaw amendments by Dr.Lucian Bebchuk, author of several papers about executive pay, and Professor at Harvard. In addition, CalPERS has submitted proposals for bylaw changes at three companies this year, after winning one last year.
Hopefully this radical new weapon will spur a new era in corporate governance.