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The fairest of them all

In our first-ever survey investors and analysts speak their minds about which U.S. companies treat their shareholders the best.

Chief executives like to call the shots, not take orders. But increasingly, big companies are being prodded, nudged and even steered by shareholders as much as by corporate chieftains. The all-too-uncomfortable bottom line for many senior managers: If you're not friendly to your shareholders, they're not going to be very friendly to you, either.

Today's headlines abound with examples of investors in uproar, including hedge fund manager Bruce Sherman of Private Capital Management, who has forced newspaper chain Knight-Ridder into widespread layoffs and discussions about possibly selling the company; William Ackman, founder of Pershing Square Capital Management, another hedge fund, has prodded fast-food giant McDonald's Corp. to sell off a portion of its company-owned restaurants; still another activist hedge outfit, Barington Capital Group, has been clamoring for auto-parts retailer Pep Boys ­ Manny, Moe & Jack to sell itself or replace its CEO.

These agitators are charging down a road paved by investors, such as TIAA-CREF and the California Public Employees' Retirement System, that have fought for greater accountability to shareholders and better corporate governance. Some, like Kirk Kerkorian, are reinvented corporate raiders from the 1980s; he has amassed a 9.9 percent stake in General Motors Corp. over the past year, is lobbying for a board seat and most recently called for a 50 percent cut in the big automaker's annual dividend. Activist San Diego­based money manager Relational Investors -- co-led by Ralph Whitworth and David Batchelder, both of whom once worked for ex-raider T. Boone Pickens -- is mounting a proxy battle against Sovereign Bancorp CEO Jay Sidhu. Then there's Carl Icahn, who is calling for a breakup of media empire Time Warner.

Together these activists are ushering in a new era of unprecedented influence for U.S. shareholders. And following the corporate scandals that accompanied the collapse of the technology stock bubble, as well as the passage of the Sarbanes-Oxley Act and other regulatory reforms, companies are far more likely to take shareholder gripes seriously. Today activists have the power of moral suasion on their side, not just big pools of money.

With so much riding on how investors are treated, this magazine decided to determine which are America's Most Shareholder-Friendly Companies. The results, published here for the first time, reflect the views of those who matter most: more than a thousand portfolio managers and analysts in the U.S. and abroad. All were asked to name the companies in their areas of expertise that are the most attentive to shareholders. The survey instructed respondents to consider the quality of the companies' governance and investor relations practices when voting. Once the votes were in, we weighted them according to place (first-place votes being worth more than second-place votes, and so on) to produce a score for each company. We present the results in 62 industry sectors.

What are shareholders looking for? In addition to strong financial performance, stock price appreciation and solid governance policies -- such as an independent board of directors, sensible executive compensation and a lack of antitakeover defenses -- investors above all want companies to be honest with them. CEOs who are accessible and forthright today can avoid locking horns with activist shareholders tomorrow, say more than a few money managers. Interestingly, stock performance clearly isn't the top consideration: Several winning companies have seen their shares lag the broader market over the past year. And survey respondents say they want companies to go above and beyond good governance. "That's the price of entry, not something we should be amazed and impressed by if they manage to achieve it," says one. Sometimes it's as simple as having a high-quality IR department.

"It all starts with the investor relations person, frankly," says one money manager about Applebee's International, which voters judge the most shareholder-friendly company in the Restaurants sector. Applebee's investor relations chief Carol DiRaimo, in particular, stands out for providing shareholders with the complete, unadulterated facts, says this voter. "She doesn't hold back information, she doesn't try to spin the truth -- she tells things like they are, and she is accessible," he says. (This month Institutional Investor also presents rankings of the best IR departments in corporate America.)

At Applebee's, excellence in shareholder relations extends all the way up to CEO Lloyd Hill. Voters appreciate that Hill and other executives at the Overland Park, Kansas­based company leveled with them about Applebee's poorer-than-expected performance last autumn. After the restaurant chain reported disappointing third-quarter earnings in October, Hill didn't try to spin the bad news; he acknowledged the shortfall and explained how Applebee's would try to fix it -- chiefly, by introducing new menu items. (Applebee's shares now change hands for about $24 apiece, below their March 2005 high of nearly $29.)

"I do know some companies that retreat into their shell when things get difficult or challenging, but Applebee's tells us what is going on, why and what they plan to do," says the voter. "Communication like that spells the difference between 'renting' a stock for a few months and becoming a long-term investor."

Another company that takes a candid approach to communication is Ryland Group. Top-ranked in the Homebuilders & Building Products sector, Ryland stands out for providing reams of data that help investors and analysts understand not only the company but the industry as a whole. That's especially helpful amid current worries about a housing bubble. "When there is so much uncertainty and anxiety about which way the real estate market is going, understanding how companies make their profits is vital," says one money manager. Unlike some of its competitors, the Calabasas, California, company breaks out how much it spends on land, for example. "They are generally more candid than other homebuilders," the money manager adds.

World-class governance policies aren't enough to mollify investors if an underperforming company isn't communicating openly and clearly with shareholders. Take the case of Pfizer. The pharmaceuticals titan is widely lauded for having an independent board. Last year it announced a $5 billion share buyback. It also changed its policy regarding director elections, mandating that unopposed candidates must withdraw if they fail to win a majority of shareholder votes. Then the New York­based company's earnings and revenues slumped, as some of its products lost patent protection and several popular painkillers, notably Bextra and Celebrex, were either withdrawn or saw sales fall amid safety concerns. Pfizer's shares dropped by 28 percent, to $21 apiece, between May and early December before rebounding slightly since then. Meanwhile, the company has stopped communicating effectively, investors say. That costs it in our rankings, as it finishes behind Eli Lilly and Co. and Wyeth in the Pharmaceuticals/Major sector.

"I would rank them as one of the most notable shareholder-unfriendly companies today," says one voter bluntly. "They retreated back into their shell when times got tough, exactly when you would think they would be forthcoming. These days it is hard for me to get past their IR department."

Amid uncertainty last fall over its anticholesterol treatment Lipitor losing patent protection, Pfizer notified investors that it would no longer offer earnings guidance. The drugmaker still commands praise for its governance, but this move was the last straw for some investors. "That makes me wonder if they have a firm idea of what's going on," says James Huguet, president, co-CEO and chief investment officer at Great Cos., a mutual fund firm in Clearwater, Florida, with $1.3 billion under management. "I want to invest in companies that not only have good policies but also communicate." (A Pfizer spokesman acknowledges the investor backlash and says that the company will once again provide earnings guidance starting February 10.)

Taking the time to help investors understand what is happening behind the scenes is even more vital for big, complex companies. Consider General Electric Co. A core holding for many investors, the conglomerate, says one voter, "can still look like a bit of a black box from the outside, even more so than other multi-industry companies, because they have so many complex businesses." But Fairfield, Connecticut­based GE wins high marks from investors -- it's ranked first in the Electrical Equipment & Multi-Industry sector -- for making sure executives are open and available to educate the market. The company's IR department, moreover, doesn't just react to requests as they come in; it regularly reaches out to even the smallest fund managers to address their concerns. "They know who owns the stock, and they are pro-active in meeting with us whenever they are in town, even though we are not going to be one of their biggest investors," says one manager.

Of course, good communication alone isn't always enough to overcome subpar performance. The most shareholder-friendly companies realize this and know when to take aggressive actions. Clear Channel Communications, the top company in the Radio & TV Broadcasting sector, was a market darling in the 1990s, when it cobbled together a national radio and entertainment empire. The San Antonio, Texas, company now faces strategic threats from innovations such as Apple Computer Corp.'s IPod portable music player, multimedia-capable cell phones and satellite radio. With its core business likely facing slower growth, Clear Channel has spun off some noncore businesses to unlock value for shareholders even as it seeks to adjust its long-term strategy. Last year it sold its concert entertainment division, now called Live Nation, and filed for an IPO of its Outdoor Co. billboard-advertising division.

"It's a way for them to highlight businesses that are doing well and growing, even as some of their other businesses may have more limited growth or face more competition," says one supporter. Even as it sells assets to appease shareholders, the company also has clearly gotten the word out to the market about its plans to exploit high-definition radio as a growth engine for the future. "They have been open about how some things they have tried haven't worked, about the kinds of challenges they face, but also about the potential they see for HD," adds this voter.

Having a star CEO doesn't always mean that a company is perceived as shareholder-friendly. Fewer than two thirds of the companies that finish first in our shareholder-friendly ranking have CEOs who were selected as tops in their sectors by voters in II's Best CEOs in America survey (Institutional Investor, January 2005). CEOs may be appreciated for being able to boldly set strategy, pull off big deals or steer companies through trying times, but without effective communication and support for good governance, they may still be seen as lacking. Clear Channel and Dell are both judged as the most friendly in their sectors, even though their CEOs weren't named as tops. The high-profile former CEOs and founders of those outfits, L. Lowry Mays and Michael Dell, have been succeeded by new leaders -- Mark Mays (Lowry's son) and Kevin Rollins, respectively -- who are still forging independent identities for themselves in the eyes of the investor community. Mays, says one voter, is "already starting to earn the respect that his father had, even if he doesn't yet have the public profile."

Not all of the companies judged the most shareholder-friendly have universally happy owners. In the Entertainment industry, for example, survey respondents regard Time Warner as the most shareholder-friendly company, despite the very public clash in recent months between raider-turned-activist Icahn and CEO Richard Parsons. Time Warner, investors say, scores higher than other entertainment companies because Parsons fosters a culture of openness with shareholders that is absent at many rivals. Viacom, ranked No. 2 in the sector, won praise last month for splitting itself into two publicly traded companies. But it has faced criticism over the imperial rule of chairman Sumner Redstone and big pay packages given to senior executives Thomas Freston and Leslie Moonves, who were promoted to share the No. 2 spot after then­president and COO Mel Karmazin left to become CEO of Sirius Satellite Radio in November 2004. At third-place Walt Disney Co., angry shareholders pushed out longtime CEO Michael Eisner last year. And fourth-ranked News Corp. irked shareholders by adopting a poison-pill antitakeover defense in 2004.

The presence of some unsatisfied owners at companies otherwise deemed the most friendly to shareholders highlights a growing concern among some institutional investors about the new wave of shareholder activists. There is no one-size-fits-all approach to governance that will ensure that a company is seen as shareholder-friendly, they caution. Although activists may be serving the greater good by drawing attention to corporate performance and governance, they may also prove to be more concerned about their own interests than with broader reforms.

"There is a risk that some investors can become self-serving when they talk about governance," warns Kurt Wolfgruber, chief investment officer at OppenheimerFunds, a New York mutual fund company that has $200 billion under management. "I don't think it's particularly shareholder-friendly if, for instance, a company does something at the insistence of the bondholders that disadvantages stockholders or that sacrifices long-term growth for short-term returns."

Adds John Coffee, a Columbia Law School professor who has studied corporate governance extensively: "These folks are not interested in do-good reforms. Their goal is to make money."

Still, the hedge funds and converted raiders are part of a broader movement seeking a bigger voice for shareholders -- one that can no longer be ignored.

"As well as these hedge funds looking for returns, the push for governance is coming from a larger and larger number of public pension funds and investment managers, more of whom are active in this area every year," says Howard Sherman, COO of Governance Metrics International, a New York firm that grades companies on governance. "The scandals that have hit the market have shown that when governance doesn't work, it can cost you a bundle -- and that good governance, paying attention to your shareholders, is worth investing time and money in."