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Max's Investment World Stock Market Challenge

Taking a Stand in the Companies You Own

All too often, individual shareholders buy stocks in companies and then forget about them. Millions of investors are content merely to get their quarterly dividend check and, as long as the stock doesn't drop precipitously, they're not likely to sell.

But what if management is not aggressive, or has made some bad blunders? What if the industry the company is in is undergoing radical change, and the firm isn't making the necessary adjustments? What if the CEO is making way too much money? Many individual investors feel they can't do anything about such problems, save selling their shares.

There is another solution: become a shareholder activist. A shareholder activist, as its name implies, takes an active stance in owning company shares. Actually, that stance should be the attitude of all investors. After all, when you buy stock, you really are part owner.

Until several years ago, the management and boards of most exchange-listed companies routinely ignored the demands of shareholders. So shareholders started getting wise, and besides pestering management at shareholder meetings, filed resolutions that appeared on the proxy statements, along with voting for directors and appointing outside accountants. These resolutions advocate many different wishes, such as not allowing the company to invest in pariah countries, eliminating company bylaws that prevent its acquisition, and pushing the company to divest assets.

Any shareholder can file a resolution, but be assured that if management is opposed to it, they will try to exclude it from the proxy by hiring a bunch of lawyers paid at company expense. Moreover, most shareholder resolutions usually don't get enough votes to pass.

But often, a majority of votes is not needed to get your point across. Even if a resolution gets only 5 percent of total votes cast, it sends a clear signal to management, which may, down the road, change its policies to reflect owners' wishes.

Bottom line: by taking an active role in stock ownership, you can actually increase your comfort level in holding certain stocks. More importantly, you can actually increase your returns. CalPERS, the pension fund for state of California employees, owns shares of thousands of companies. It found that where it took an active role in trying to boost company performance, share prices improved.

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