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Published: Tuesday, 12/3/2002

After year of scandal, investors realize they need to take action

A year ago yesterday, Enron Corp. dropped its bombshell: The energy company filed the biggest bankruptcy to date, listing more than $31 billion in debts and $50 billion in assets.

For a time, it looked like American stockholders had become the forgotten species. Their hard-earned cash, invested in a dangerously managed company, became virtually worthless.

And then it got worse. A wave of corporate failures ensued, along with revelations of massive fraud, accounting chicanery, and incredible perks for the perps. Barely 71/2 months after the Enron debacle came the bankruptcy of WorldCom, which listed $41 billion in debts and $107 billion in assets.

Add the failures of the likes of Global Crossing and Adelphia Communications, and it's been a crummy year for stockholders.

The federal government threw a few bones to investors. The Sarbanes-Oxley Act requires chief executive officers to attest to the accuracy of their financial reports, limits such perks as multimillion-dollar loans to executives, and increases penalties for defrauding shareholders.

But, for stockholders, there's still a long road before they can claim ownership of the corporations they supposedly own. They may have to take matters into their own hands and vote on ballot proposals at the firms' annual meetings, insist on directors who look out for shareholders' interests, and press CEOs to perform or get fired.

There are some encouraging signs. For several years, shareholders have made gains, passing an occasional corporate-governance measure. This year, for example, 56 percent of EMC Corp. shares were voted for a proposal calling for a majority of independent directors. It ended up being a non-binding resolution, but the shareholders made their point.

And shareholders have gained a tremendous amount of education in the last few years. Many won't be stupid enough to invest again in companies that can't show where their revenue comes from and where it goes. Many a shareholder has learned the hard way that accounting standards do matter, footnotes do matter, and truthfulness and ethics do matter.

Unfortunately, too many shareholders still don't believe their vote matters. If a shareholders says, “My hundred shares won't make a difference,” it becomes a self-fulfilling prophecy. Of course it won't matter if the proxy sits unused in a drawer.

Stockholders - the owners - have a right to insist on pay for performance. If a company's managers proves to be incompetent, they should be fired. The board should make sure of that.

Shareholders also have the right to expect diligent, watchful directors. Folks who belong to bowling leagues, golf clubs, and social organizations pay more attention to those boards than they do to the boards of companies controlling the livelihood of thousands of shareholders and employees.

It's tempting to think that the really big stockholders - mutual funds, pension plans, and other institutional investors - would take the lead. The little guy, the small stockholder, could hope the big boys would give us some direction, put some muscle into corporate governance.

But that may be a misplaced hope. A recent study by Thomson Financial found only about a fifth of institutional investors are taking a more active stance, and more than 71 percent don't expect to be more aggressive any time soon.

So, maybe it comes back to the individuals after all.

There's one more thing they can do:

They can quit buying stock in companies that refuse to take hints from shareholders.

They can quit hoping that leopards will change their spots.

They can invest their money in companies that have enlightened boards and management.

If they can find them.



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