(FORTUNE Magazine) – In the long history of AT&T and its progeny, the Baby Bells, no proxy resolution opposed by management had ever been approved by shareholders. But this spring retired workers from Verizon led an investor revolt to curb severance pay for executives. "For a little grassroots retiree organization to defeat Verizon in the proxy is nothing short of Herculean," says C. William Jones, executive director of the Association of BellTel Retirees.

Spurred by a depressed stock market, corporate scandals, and disgust at greedy CEOs, investors have managed to pass a record number of proxy resolutions: more than 125 as of May 30, with the 2003 total likely to climb past 150. That's 50% more than in 2002, itself a record year. While the inmates aren't about to take over the asylum--the vast majority of shareholder resolutions failed, as they do every year--investors are making management take notice.

So far, in addition to defeating Verizon, shareholders have won resolutions to limit severance pay at Alcoa, Delta, Tyco, and Hewlett-Packard. They voted to expense stock options at Apple, Eastman Kodak, and Starwood Hotels; to eliminate staggered boards at Avon, Boeing, and Weyerhaeuser; and to oppose poison pills--anti-takeover provisions--at Southwest Airlines, Delphi, and Yahoo. In each case they did so over the opposition of management.

The catch: Shareholder votes are only advisory and often elicit little more than a promise from the board to study an issue. That's what has happened so far at most of the companies above. The Apple board said it was not yet ready to expense options, even after investors holding more than 50% of shares voted to recommend doing so. Across the board, executives lobbied furiously to ensure certain proposals were voted down. In one of this year's most hard-fought contests, Intel defeated, by a narrow 53%-to-47% margin, a proposal asking it to expense options.

Still, longtime shareholder advocates say they've made five years' worth of progress in five months. "I think we're approaching a new era in terms of shareholders' standing up for their rights," says Tim Smith, a senior vice president at Walden Asset Management and a shareholder advocate for 30 years. Just as important, he says, "we've seen that managements are listening."

Furthermore, proxy votes tell only part of the story. Many boards have agreed to change governance practices to avoid embarrassing shareholder challenges. Verizon, again at the behest of its retirees, said it would alter the formula it uses to calculate executive compensation to exclude profits derived from its pension plan. McDonald's arranged for representatives of Walden, the social-investment arm of U.S. Trust Co. of Boston, to meet with independent directors and begin a governance review. Seventeen companies agreed to expense options rather than face resolutions put forth by a coalition of trade unions, which won votes on options at 25 other companies (including the aforementioned firms and others such as U.S. Bancorp and J.C. Penney).

While very few social and environmental resolutions have passed, they too are winning record levels of support. Dell Computer recently agreed to set goals and measure progress in the recycling of its computers, a growing tech-industry issue. Under pressure from protesters and activist shareholders led by the Calvert Group, a social-investment firm, Dell also pledged to do what it could to bar the export of computer waste to the developing world. "This year we are pushing for action rather than words," says Julie Frieder, Calvert's environmental analyst.

As this year's proxy season winds down, activists looking to 2004 are setting their sights on the ultimate target: enabling shareholders to nominate their own candidates for director. "Everything else is nice," says veteran shareholder advocate Nell Minow. "That would be really meaningful." Several AFL-CIO unions will push that issue next year at select companies, including AOL Time Warner, parent of FORTUNE's publisher. "That will be a pitched battle," predicts Ed Durkin, a carpenters' union official who organized this year's successful campaign over options. If investors can someday choose their own nominees to the board, they will settle, once and for all, the debate about what it means to be a truly independent director: someone not chosen by the CEO.

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