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Experts: Take-Two Coup a Governance Win

The shareholder uprising that threw out nearly the entire board of Take-Two Interactive Software Inc. was a victory for investors who are fighting for new leadership at troubled companies, corporate governance experts said Friday.

The upheaval at the publisher of "Grand Theft Auto" and other video games culminated Thursday with the election of a new chairman, the appointment of new directors and the ouster of the CEO.

Experts marveled at the swiftness of the coup, saying it reflects the growing sense of cooperation among disgruntled shareholders looking to dispatch with embattled corporate leaders.

Grievances with a public company's board are typically fought in drawn-out proxy battles that can be costly and frustrating even for large shareholders.

But the Take-Two revolt took less than a month to pull off.

It started earlier this month when a group of large shareholders mounted a public campaign to weed out directors they blamed for the company's financial woes and ethical lapses. The final vote tally was revealed Thursday, shortly after the game maker's annual meeting in New York.

"Institutional shareholders are much more aware now, and they're much more organized -- they're not acting as lone wolves anymore," said Eleanor Bloxham, president of The Value Alliance and Corporate Governance Alliance in Westerville, Ohio. "And when a company has lost its way, like Take-Two obviously has, they're willing to come together and make something happen."

A spate of corporate scandals has spurred investors to push for ways to make it easier to replace board members, but such efforts don't always work out.

Earlier this month, for example, Hewlett-Packard Co. shareholders voted down a proposal that would have changed the company's bylaws to allow investors to nominate directors. The proposal was pitched as a way to ensure director accountability after the boardroom spying fiasco involving former Chairwoman Patricia Dunn and several senior HP employees.

HP opposed the changes, as did some of the company's biggest stockholders, and the measure failed.

The situation at Take-Two also had unique characteristics:

  • The investor group that spearheaded the revolt controls nearly half of the company's shares. At most public companies, even large investors usually control only a small fraction of shares.
  • A former Take-Two executive carries the dubious distinction of being the first chief executive to be convicted of backdating stock options. Ryan A. Brant, the company's former chairman and CEO, pleaded guilty in February to first-degree falsification of business records.

Still, the takeover sends a message to directors of other companies that their jobs are in jeopardy if they lose sight of their commitment to shareholders, said B. Espen Eckbo, the founding director of the Center for Corporate Governance at the Tuck School of Business at Dartmouth College.

The company's underlying financial troubles have rankled investors and were major reasons behind the push for a change at the top.

Despite having a lineup of top-selling games, Take-Two, one of the world's biggest video game publishers, lost nearly $185 million last fiscal year while rivals Activision Inc., THQ Inc. and top-selling Electronic Arts Inc. all managed to post healthy profits.

"The pendulum is swinging in the U.S. toward more hiring and firing of directors -- the board is being held to a higher standard as we go forward than ever before," Eckbo said. "Boards are literally being re-educated about what their jobs are."

Still, Take-Two's stock price rose more than 13 percent from last year until Thursday.

The stock lost 96 cents, or more than 4.5 percent, to close at $20.14 in Friday trading on the Nasdaq Stock Market on concerns that the new directors didn't offer enough guidance on how they intend to turn the company around.

Michael Pachter, a research analyst at investment banking and brokerage firm Wedbush Morgan Securities, said he was unimpressed with the appointment of an acting CEO instead of a permanent one and the board's lack of clarity on how to return the company to profitability.

"I thought they would have identified someone right away," he said. "And I was a little surprised that they said they would have a strategy in 3 to 6 months. It's probably unfair to expect that the dissident shareholder group could pull something together this fast, have a strategy ready and move on, but certainly that was the implication."

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