(FORTUNE Magazine) – I HAVE SOME VERY interesting questions for them this year, you can be sure,'' says gadfly Evelyn Y. Davis about one FORTUNE 500 company whose annual stockholder meeting she plans to attend. Even if the dread ''lady in red'' fails to show up to grill you at your gathering, are you prepared to stand before testy shareholders or chanting church groups while below you a row of smirking reporters scribble notes? Can you defend the king's ransom you get paid? How will you justify your minority hiring record, and what about the $400,000 you spent on that glossy annual report? The New York and American stock exchanges and most states require that the leadership of a public company come before its stockholders once a year to field questions and hear its work critiqued. Says Westvaco Chief Executive John Luke, who put a relatively quiet meeting behind him in late February: ''It's a chance to present our report card to our owners.'' Surprisingly, given the degree of executive anxiety they arouse, annual meetings are usually banal to the point of boredom. In many cases the company's most important shareholders -- the institutional investors -- never appear. Says Evelyn Davis, who has attended hundreds of such dull assemblies: ''Sometimes I am the only excitement there.'' Nevertheless, if you reported a loss in 1988, or your board awarded you a hefty raise, or one of your shareholders introduced a new resolution, you had better know how to protect your flanks. Here are some tactics and advice for executives who find themselves chairing annual meetings. ''Preparation, preparation, preparation,'' urges Arnold Zenker of Boston- based Arnold Zenker Associates, who coaches managers in strategies for handling the public and the press. ''Amateurs think fluidity on stage happens by accident; professional communicators know better.'' Unfortunately, the prepping routine for most companies ossified long ago and today consists of little more than updating the briefing book -- as the study manual for annual meetings is often called -- with relevant new questions and answers that the finance and public relations departments have prepared in the weeks before the meeting. Some typical Q's and A's might concern dividend policy, environmental hazards, and minority hiring practices. The division heads and inside directors then rummage through the book to be sure they agree on the issues. The CEO practices his speech, and the rest is left to chance. BE WARNED: The risk of ambush is real for those unwilling to prepare. In 1987 T. Boone Pickens, who only the year before founded an organization called United Shareholders Association to lobby for shareholder rights, tried to conduct Mesa Limited Partnership's meeting of unit holders without first electing a board of directors (limited partnerships don't require them). Then he riled the gadflies who called him on it by limiting their questions. Later he threatened to cut off one speaker's microphone. The confrontation became the subject of a story in the Wall Street Journal. Says Evelyn Davis: ''Mesa was a mess.'' If you are less inclined than Boone Pickens to fly by the seat of your % pants, Virgil Scudder, president of MediaCom, the division of Hill & Knowlton that preps executives, recommends that you rehearse. That's what Presidents of the U.S. dating back at least to Kennedy have done before crucial encounters with the press. A staged mock meeting with someone playing the role of a gadfly is a good way to test your arguments and refine your positions for clarity and credibility. YOU CAN'T PREDICT the potpourri of questions you'll get, but you can reduce some of your anxiety by remembering that individual shareholders often have a different frame of reference than management does. They are more likely to respond to what they hear on the evening news than to what appears in the Wall Street Journal. Martin S. Davis, chief executive of Gulf & Western, predicted before his meeting in early March that he would be asked about Salman Rushdie's book The Satanic Verses, even though Gulf & Western's Simon & Schuster division did not publish it. Sure enough, a shareholder rose to inquire if Davis would have removed the book from bookstore shelves. Davis pounced: ''No, we would not . . . When you are in the publishing business, you have a sacred duty to maintain editorial integrity, and that is what we are committed to doing.'' His prompt if pat response earned him hearty applause and put the audience squarely in his corner. The chairman can best protect himself by adhering to a few ground rules. First, he should avoid being too definite -- so don't swear you will be out of the red by the next quarter. As Virgil Scudder puts it, ''Don't be absolute unless you can be absolutely absolute, which is rarely.'' On the other hand, don't dismiss a question with a brusque ''No comment.'' At the very least give a reason why you can't comment. Bad news, such as a reported loss, is best dispensed with quickly. Says Arnold Zenker: ''If the issue is a tough one to deal with, try to sweep it off the table as quickly as you possibly can. Don't evade it. But don't spend a lot of time on it.'' When you announce disappointing earnings, for example, say what they are and what caused them, adding, if you can, that those factors affected other companies in your industry. Then tell what you're doing to improve profits this year. Says MediaCom's Scudder: ''Even shareholders, a tricky and an impatient bunch, will understand if you say we miscalculated and here is what we have done to rectify the situation.'' But Scudder also warns that if you've had a bad year, don't spend $50,000 for an extravagant 12- projector slide show to say so. Conversely, if the news is good, Zenker suggests you ''treat it like a lollipop and lick it to death.'' No doubt you can defend your company's position on sensitive social issues, such as whether to do business in South Africa. Take heart, too, that proposals touching on corporate social responsibility do not pass over the opposition of management. Most activist shareholders don't expect to win; what they realistically -- and appropriately -- hope for is the chance to air their points of view. The best strategy for management is to be polite and willing to listen and to avoid confrontation. Use Bristol-Myers as your model. Timothy Smith, executive director of the Interfaith Center on Corporate Responsibility, which represents 240 Catholic and Protestant investor groups, commends the pharmaceutical company's chairman, Richard L. Gelb, for his deft handling of the South Africa issue. Although he disagrees with it, Smith cites as particularly impressive the company's written response in the proxy statement to the ICCR's divestment proposal. Its conclusion: ''The Company, therefore, opposes the South African system of apartheid as morally indefensible and believes it should be abolished as quickly as possible. The differences between the Company's position and those who support divestment are not over the evils of apartheid. The differences are in the perceptions of the most effective means of combating those evils . . .'' GELB ALLOWS lengthy discussion of the subject during the stockholder meeting. Smith and other activists put John Reed, the chairman of Citicorp, on the other end of the tolerance spectrum. Says Smith: ''The South Africa issue has plagued them for years. Reed does not want to hear opposing views.'' Here are effective ways to handle a few other common topics at annual meetings: -- Executive compensation. If your salary, bonus, or stock option plan irks your shareholders, the experts suggest you note that the board of directors gave you the raise and (assuming this is true) that your pay is consistent with that of comparable executives in your industry. Expect to be asked why, if you got a raise, they shouldn't get more -- in dividends. -- Affirmative action. If your company is still weak in this area, you may as well admit it and talk about what you are doing to change it. Last year Robert Allen, the newly named chairman of AT&T, faced two affirmative action proposals. He commented as he introduced the first: ''If you ask me whether there is room for improvement in getting more minorities and women into the higher levels of management, my answer is most assuredly yes. If you were to ask me, are we doing anything about that, my answer again is yes.'' He then described an advisory board that had been set up the year before to deal with the problem. -- PACs. This year, for the first time, Common Cause will be going to stockholder meetings. The 280,000-member citizens' lobby has shareholder resolutions asking ten major companies, including American Express, General Electric, General Motors, Mobil, and Unisys, to let shareholders know how much money is being contributed to political action committees by the corporation and where it is going. Common Cause also hopes to get top management to divulge whether it favors legislation designed to put restraints on PACs. Each company is expected to recommend a vote against the proposal, with most arguing disingenuously that they are not in the business of crusading for political reform. -- Takeover defenses. A little passion on behalf of your company's continuing independence can't hurt. Take a line from Harry K. Wells, former chairman of McCormick, the spice company, who vigorously and successfully defended his company against a hostile takeover bid by Sandoz, the Swiss pharmaceutical concern. At the 1980 stockholder meeting, Wells set audience sympathies ablaze with a barn-burning speech that ended, ''Let me conclude by saying that McCormick is more than a mere commodity to be bought and sold like a contract for pork bellies!'' A range of other touchy topics, from animal rights to Catholic employment in Northern Ireland, await chairmen at other meetings. Union Carbide will need to reassure a group of shareholders who want the company to provide ongoing assistance, not just financial restitution, to the 30,000 victims of the gas leak in Bhopal, India. And Philip Morris may have to parry Father Michael Crosby of the Capuchin Franciscans, who claims that tobacco causes more than one million deaths globally each year and wants the company to stop producing cigarettes by 1992. Management faces the greatest risk of bushwhacking during the question period that usually follows the voting on resolutions. Expect everything from complaints about your products to queries about your golf handicap. One year a Gulf & Western shareholder asked Martin Davis for a job and another proposed a girlfriend for a directorship. To speed its meeting along, Becton Dickinson distributes in advance a list of answers to the most common shareholder questions. During the Q&A, resist the temptation to swat the gadflies. The cardinal sin is to lose your cool. Here it helps to know your enemy. Lewis Gilbert and his younger brother, John, turn up at as many as 150 meetings a year to argue for cumulative voting on proxy resolutions and against staggered boards of directors and mergers that don't give shareholders a choice of cash or new stock -- what Lewis refers to as ''freeze-outs.'' The obstreperous Evelyn Y. Davis, a former publicist, insists on calling chairmen by their first names. She lobbies against golden parachutes and greenmail, and she objects to companies' giving away her money through corporate contributions to charities. She also tirelessly promotes her newsletter Highlights and Lowlights, a 20-page, $230-an-issue compendium of her opinions on top managers and their meetings. Two lesser-known characters likely to raise their hands are Samuel Yake, an 18-year-old protege of Lewis Gilbert who works the gatherings like Hershey's near his Pennsylvania home, defending shareholder rights, and George Sitka, a convicted tax evader with a grating voice, who plans to hammer the big banks this year for their Latin American loans. THERE ARE GADFLY repellents. Some corporate secretaries take their staunchest opponents to lunch sometime before the meeting to feel them out on certain issues and anticipate the toughest questions. A better deterrent is to set strict guidelines in advance of the meeting, such as a three-minute and two-question limit per speaker. Shareholders generally abide by these rules and side with management if the gadflies break them. Arnold Zenker recommends that you don't surrender the microphones. He suggests that ushers carry shotgun or directional microphones, which they can point at the speakers but not actually put in their hands. AT&T uses phone booths in place of microphone stands, and the chairman can control the volume and cut off the sound if necessary. If you are tempted to counterattack, your repartee had better be good. Some years ago Evelyn Davis stood up for the third or fourth time at a Becton Dickinson meeting and announced that she had recently bought two of the company's thermometers -- one oral, one rectal. Why was it, she asked, that the rectal one was accurate but the oral one was way off? A stunned Henry . Becton stared at her until rescued by Willard Andrews, a senior executive who ran the Brazilian operations where the thermometers were made. Recalls Andrews: ''I said, 'Well, Mrs. Davis, I can understand why you would get an accurate reading with a thermometer used rectally. But, unfortunately, for a thermometer used orally to register properly, one must be able to keep one's mouth shut.' '' The audience greeted Andrews's zinger with a roar of approval.