Who caught Carl Icahn’s latest project, at eBay? He plans to nominate two director candidates, and wants it to spin PayPal into a separate company.

He has also agitated for at least $50 billion in share repurchases in 2014 at Apple (see proposal 10, p. 62 of this year’s proxy statement).

What connects these two? He submitted non-binding (precatory) shareholder resolutions on these subjects. He proposed the same types of resolutions that individuals, labor pension funds, and socially conscious institutions propose. At Apple, investors will also vote on resolutions concerning human rights, sustainability, proxy access, and data confidentiality, things that investors routinely ignore (as they should), along side Icahn’s proposal. Why would he get mixed up with this stuff?

Icahn has not talked about his methods. He may do this, though, because starting this year, shareholder proposals can pressure corporations in new ways. BoDs must respond to winning shareholder proposals, or face the likely prospect of more serious opposition in subsequent years.

Relational Leads the Way

Icahn probably studied what happened at Timken in 2013. Relational Investors and CalSTRS wanted Timken to spin off its steel business, and submitted a non-binding proposal (see Item 6. on p. 48) for shareholder vote at the 2013 annual meeting. The proposal won 53% of the vote.

The BoD would typically ignore such a proposal, even one that attracts a majority of votes. The resolution recommends the BoD merely “engage an investment banking firm” to explore the spinoff, and the proposal won by only a relatively narrow margin. The company had no obligation to treat it any different than a social, environmental, or governance resolution.

Yet, listen Timken did. A mere four months later, they announced the spinoff, with even a slight nod to “shareholder input.” Why?

BoD Risks Rejection

A BoD that ignores investors should indeed face consequences. Of course, shareholders could oppose that BoD at the next annual meeting. Yet, it would take a concerted effort to muster enough opposing votes in a contested election to get BoD attention.

Until last year. Then, ISS changed its policies about directors that ignore shareholder proposals. Previously, it would oppose directors who ignored proposals that won a majority of shares outstanding. At that level, few shareholder proposals would earn ISS opposition. Starting in 2014, ISS will oppose directors who ignore proposals that win a majority of shares voting - a lower threshold.

It mattered at Timken. The spinoff resolution earned votes equal to 46% of shares outstanding, but 53% of shares voting. Had the BoD ignored it, ISS would have certainly opposed the BoD the next year. And with Relational and CalSTRS around, investors would have a superb slate of director candidates to consider.

Thus, a BoD that ignores a winning resolution will face concerted opposition from ISS (and possibly Glass Lewis), not just from a few angry investors.

Back to Apple and eBay

Carl Icahn undoubtedly saw what happened at Timken. He must figure:

1. ❖A shareholder proposal costs nothing to submit and promote
   

2. ❖A well-structured proposal has at least a reasonable chance of winning a majority of votes cast at the annual meeting
   

3. ❖If the BoD ignores a winning proposal, next year Icahn could nominate BoD candidates that have an even better chance of winning.
   

But, he doesn’t want BoD seats, he wants the share repurchase at Apple, and the PayPal spinoff at eBay. The threat of running against Carl Icahn’s candidates next year, whom ISS will most likely support, should worry Apple and eBay directors. No wonder Apple CEO Tim Cook has met twice with 4% shareholder Icahn.

So, Carl Icahn has probably studied Timken. Apple and eBay should, too.