Angry shareholders gear up for battle

NEW YORK (CNNMoney.com) -- Shareholders have a lot to be unhappy with this proxy season. After all, they've lost billions of dollars due to the weakening economy and the mortgage meltdown.

Eager to reverse this trend, activist labor unions and hedge funds are gearing up for what experts say will be the busiest season ever for proxy fights. They have given companies a list of demands, which include board seats and better disclosure of risk management practices.

Already, up to 80 battles are underway, according to industry observers. Investors are taking action because they are upset at financial firms' lax lending policies, which have spurred a credit crisis, and at other companies' failure to respond to the economic downturn. At the same time, a growing number of hedge funds are exerting influence at companies they see as undervalued.

"Anytime you've got companies with governance structural issues and a declining economy and declining share values, you've got fuel for the fire," said Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware.

Labor unions are leading the charge against financial firms and homebuilders they say are largely responsible for the credit crunch that has cost people their homes and jobs, as well as wiped out nearly $300 billion in shareholder value.

Activists want companies to disclose

The Laborers' International Union of North America, for instance, has filed 28 shareholder proposals at a wide array of companies. The union, which represents construction workers, wants banks and Wall Street brokerage houses to better disclose their subprime mortgage operations. It is calling on credit rating agencies to make their relationships with bond issuers more transparent. And it is asking homebuilders to provide more information on their mortgage operations.

"Shareholders need to be able to adequately monitor risk when they decide to make investments in these companies," O'Dell said. "Our proposals are about increased disclosure."

These proposals, however, won't make it into the proxies at many of the targeted firms since the companies successfully appealed to the Securities and Exchange Commission to keep the measures off the ballots. The union did score two victories when Ryland Group (RYL, Fortune 500) agreed to disclose more about its mortgage unit and Meritage Homes Corp (MTH). said it would improve its succession planning. Another target, Beazer Homes USA Inc., said it would exit the mortgage business.

Meanwhile, CtW Investment Group is focusing on the risk management committees of the boards at six major financial firms, including Citigroup, Merrill Lynch and Bank of America.

CtW Investment, which works with the pension funds of unions affiliated with Change to Win movement, has asked to talk with 22 directors on these committees about their oversight during their companies' growth into the volatile subprime mortgage arena. Most companies have agreed to meet, said Michael Garland, CtW Investment's director of value strategies. If the Washington D.C.-based group doesn't like what it hears, it will urge shareholders to withhold votes for the directors.

"We want to make sure the boards, and risk oversight committees in particular, are comprised of qualified, independent directors," Garland said.

Calls seeking comment from Citigroup (C, Fortune 500), Merrill Lynch (ML), Bank of America (BAC, Fortune 500) and Beazer (BZH, Fortune 500) were not returned.

Withholding votes for directors has become an increasingly popular strategy, according to proxy experts. Many companies have adopted rules in recent years that require directors to win a majority of votes, said Patrick McGurn, special counsel at RiskMetrics, a proxy advisory firm based in Rockville, Md. If they don't, they often must either step down within 90 days or tender their resignation, which the board doesn't have to accept.

More shareholders join the bandwagon

The labor unions' efforts come at a time when shareholders are growing increasingly active. Spurred in part by governance reforms required by Congress in the aftermath of Enron's collapse, companies are more willing to sit down with activist shareholders. And the success of past actions has emboldened investor groups to engage management.

"What's changing is proposals are getting broader support from institutions and other shareholders," said Bob McCormick, chief policy officer at Glass Lewis & Co, a proxy advisory service in San Francisco.

Last year, shareholders initiated 501 campaigns against management, both as part of proxy season and outside of it, according to John Laide, product manager at FactSet SharkWatch, which researches takeover defense and activism. This is up from 429 efforts the year before.

About half of these battles are conducted by hedge funds, which have grown increasingly active in engaging management. And they are successful in gaining at least some concessions more than half the time, Laide said.

In one of this year's skirmishes, an investment group is waging war on The New York Times Co. (NYT), which has seen its stock price decline about 21% in the past year. The group, which includes the hedge fund Harbinger Capital Partners, the Times' largest shareholder, plans to file a proxy proposing its own slate of four directors. The investors said in a letter to company executives that the current board has not inspired the "bold action" necessary to capitalize on the media industry's shift to a digital world.

The Times believes its candidates are experienced and well-qualified, but the board's nominating committee intends to meet with Harbinger's slate, the company said in an emailed statement.

This is but one of many battles expected to take place at corporations as diverse as fast-food chain Wendy's (WEN) and transportation company CSX (CSX, Fortune 500).

"By all measures, 2008 is shaping up to be the year of the activist hedge fund," said Damien Park, president of Hedge Fund Solutions, a Philadelphia-based consultant to companies facing hedge fund actions. "Stock values continue to decline so activists see this as an opportunity to take a large position and act for change."