NEW YORK (AP) While the financial ''victory'' from a shareholder lawsuit is often pathetically small for anyone but the lawyers, some investors are using litigation as a billy club to at least force big changes in the way companies are run including reforms that most of the corporate establishment has been fighting hard to block.
Investors in Broadcom Corp. won a settlement last week in which the semiconductor manufacturer agreed to give shareholders the ability to nominate candidates for one seat on the board of directors. By contrast, the Securities and Exchange Commission has met fierce resistance to a proposal just to allow shareholder nominations under very limited circumstances.
The deal, which settles charges that Broadcom disseminated misleading information, also tackles another contentious issue by requiring the company to gain shareholder approval before granting new stock options to top officers or ''repricing'' old options rendered worthless by a declining stock price.
Another chip maker, Applied Micro Circuits Corp., also agreed to key governance concessions in a settlement announced this month. The company now has to appoint two different people to be chief executive and chairman of the board, a form of checks and balances that's fairly common overseas, but relatively rare in the United States. Applied Micro also agreed to add two new independent directors to the board and ensure that at least two-thirds of the board and all board committees are independent.
In addition to attempting to address troubles at the companies, these settlements help debunk arguments against further governance reform for all public companies.
Even if you don't buy the notion that a shareholder-nominated director might improve accountability to shareholders, it seems highly unlikely that Broadcom, a major provider of broadband and other communications chips, will suddenly collapse into corporate dysfunction when the settlement is implemented.
Nonetheless, the U.S. Chamber of Commerce and the Business Roundtable, an association of 150 CEOs from major corporations, have been lobbying the SEC with warnings that the boardroom will be hijacked by special interests such as unions or environmental groups. This stepped-up campaign has raised the possibility that the SEC's shareholder access proposal might be delayed, weakened or scrapped altogether.
Though the management at Broadcom and Applied Micro were muscled into concessions, it's hard to fathom that they would have signed on if doing so would spell certain ruin.
For now, however, these examples are the exception. Only four of the 63 settlements reached in class-action shareholder suits so far in 2004 have produced governance reforms, according to Bruce Carton, executive director of securities class-action services for Institutional Shareholder Services, an adviser to major money managers.
But while hardly an avalanche of reform, the recent activity does stand out compared with the prior two years, when only five of 346 settlements produced governance changes.
And regardless of the rarity, the logic behind seeking governance concessions is fairly intuitive.
To begin with, when scandal or other misdeeds send a stock plunging, it's nearly impossible for investors to recover their losses through litigation.
Although shareholders ''won'' about $8 billion last year in settling class action suits against public companies, according to ISS, the only consistent winners were the lawyers who represented them.
A law firm such as Milberg Weiss Bershad & Schulman LLP, which ISS ranks as tops in the field with 65 settlements worth $2.1 billion during 2003, may keep anywhere from a fifth to a third of a damage award. By contrast, the median recovery for shareholders from a settlement amounts to just 4 percent of their losses, according to Cornerstone Research.
In the meantime, while individual investors hurt by past troubles may no longer be shareholders, institutional investors such as mutual funds and pension funds often have no choice but to remain because they need to keep their holdings diversified. So while there's little hope of recovering money lost, institutions have every motivation to push for better performance in the future. In fact, since so much of the settlement money can go to lawyers and former shareholders, a large settlement is a double-edged sword.
''When you're settling these cases, you have the attention of management,'' said Robert Monks, a longtime advocate for corporate governance reform who now advises Lerach Coughlin Stoia & Robbins, a law firm that helped negotiate the Broadcom and Applied Micro deals. ''So I say in addition to money, we should ask for governance changes because then we could say that we are improving the company, and the lawsuit isn't just about taking money out of the company.''
The legal fees from a governance settlement can be a pittance compared with the payoff from a big damage award, often totaling between $500,000 and $1 million. But since firms such as Lerach Coughlin and Grant & Eisenhofer are also eagerly courting the same institutional investors as the lead plaintiffs for big-money class action suits, they may see governance-oriented lawsuits as a way to please the client a loss leader of sorts for the securities bar.
That, coupled with the investor activism spurred by scandal and prodded by crusaders like Monks, may help transform securities litigation into a new engine of shareholder rights rather than merely a moneymaker for law firms.
Bruce Meyerson can be contacted at bmeyerson(at)ap.org
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