Shareholder Activists Set to Drill Oil Companies

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The prevailing short-sighted view of risk creates an opportunity for investors with longer time horizons, who are more inclined to look for problems that may crop up, he says.

Kurtz would prefer that the damages companies are required to pay for litigation and environmental destruction continue to come out of shareholder equity rather than out of cash reserves earmarked to cover such events. That's the only way to get investors to make it common practice to weigh environmental risks, along with other risk factors, when deciding whether or not to invest in a company, he says. He suspects that any attempt to assign a monetary value to such risks before they manifest would only enable companies to manage the reserves to help bolster or reduce their profits.

Minow at the Corporate Library agrees that investors need to consider such risks when researching companies to invest in. She would also like to see these risks accounted for on companies' balance sheets. Apart from what she says is BP's environmental negligence, the company embarked on a project "without any idea of how to handle it if things went wrong," something Minow calls "utterly indefensible." The fact that BP didn't have a backup plan in place speaks to sustainability issues, she adds.

She sees a clear parallel with the fate of Texaco, which—while still an independent company—was forced to file for bankruptcy in 1987 so it could continue operating while it figured out how to recover from a huge civil verdict stemming from its attempted acquisition of Getty Oil.

shareholders might write in directors

The financial industry reform legislation that's now in conference committee between the U.S. Senate and the House of Representatives includes provisions for shareholders to propose their own board candidates on companies' proxy cards, which will put unprecedented pressure on individual directors, says Minow. She believes this—more than resolutions, which aren't binding—will be the focus of shareholder activism.

"[Primary attention] is going to be on replacing boards of directors and if the board of directors at BP didn't do a good-enough job of responding to problems, they'll be out," she predicts. If BP lacks directors with environmental credentials, some will have to be found and added, she says.

Coming as it did toward the end of proxy season, the timing of the Gulf disaster may seem unfortunate for activists, but Minow believes time will confer an advantage. By the time the 2011 proxy season comes around, she predicts that the financial reform legislation will have passed, opening fresh opportunities for activists to exert pressure on companies.

"There's a reason shareholders' resolutions have to be in by fall for meetings in the spring. It gives corporations a really good opportunity to get their acts together before shareholders start proposing resolutions," she says. "Partly for that reason, I suspect [BP chief executive officer Tony] Hayward will be out by the end of the summer."

Bogoslaw is a reporter for Bloomberg Businessweek's Finance channel.

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