Moreover, the new level of activism practiced by such groups is fundamentally altering the relationships between shareholders and executives. “What’s happening is it’s ‘us and them,’ ” reports Craig Nordlund, senior vice president, general counsel, and secretary for Palo Alto, California-based Agilent Technologies Inc. But Patrick McGurn, senior vice president and special counsel at ISS, believes such divisiveness is a symptom, not a cause. After the Buffett incident, “we were called idiots,” he says. “But if that’s the tenor of the debate the corporate community wants to have, that’s a sign of a bigger issue.”
Send ‘em the Bedbug Letter
The budding radicalism of investors is hardly surprising. Investors may be the owners of companies, yet they’ve rarely been treated as such. Shareholder proposals — which are nonbinding — have been blithely ignored by many corporate boards. In some cases, managers have regarded vocal stockowners as meddlers or, worse, interlopers. “Somehow we’ve lost sight of the fact that with ownership comes certain prerogatives,” says Pitt. “And one of those prerogatives is to be treated as if your views are important.”
The high number of dead (uncast) proxy votes, though, has led many companies to pay lip service to investors. Since in the past 60 percent of proxy votes were dead, notes Eckbo, “the culture of top management has been, ‘We don’t have to pay attention to those guys.’” That sort of thinking, of course, led to the scandals at Enron, Tyco, and WorldCom, where managers treated their companies as personal fiefdoms — and vaporized billions of dollars in shareholder value in the process. “Anything that can change this mind-set is good,” argues Eckbo.
As the Buffett episode shows, however, governance advocates may be overreaching to make a point. Fifty-five percent of finance executives in the CFO survey said shareholder activists have simply gone too far. Many believe investors and advisory firms are starting to take a broad brush to governance, ignoring a company’s particulars and deferring instead to a checklist of governance best practices.
The checklists touted by consultancies such as ISS — which go through proxies for portfolio managers, summarize the issues, offer a yes or no recommendation, and then explain the recommendation — have come in for the most criticism. In fact, half of the respondents to the CFO poll said proxy-advisory firms are not familiar with the fundamentals of their business. And 65 percent said governance checklists fail to account for the individual circumstances of a business. “The problem is, they’re formula voting,” argues Roger Plank, CFO of Houston-based Apache Corp. “I don’t think they make an effort to look at us as an individual company.”
Plank experienced this blunderbuss approach firsthand in a recent document sent by a dissident shareholder group. In it, the investors torched Apache, chiding the company for failing to adopt the group’s vision of good governance policies. But as Plank read through the indictment of Apache, he noticed one small error. In one part of the document, he says, “[the shareholder group] called us by our competitor’s name. Turns out it was just a form letter.”