Who’s the Boss?

Shareholder activists want more say in how American companies are run.

They’ve Got Issues

If mass-mailings have finance chiefs steaming, so, too, do some of the individual best practices being touted by shareholder activists and their advisers. ISS, for instance, supports a mandatory retirement age for board members, as do many institutional investors (with 70 being the most common age). Hard evidence linking this policy to improved corporate performance, however, is hard to find. Says Jeffrey Sonnenfeld, a Gevity HR Inc. board member and associate dean of executive programs at the Yale School of Management: “There is zero evidence showing that wisdom is a bad thing.”

Moreover, the separation of the CEO and chairman posts — high on the list of many shareholder activists — certainly didn’t improve the fortunes of Enron’s shareholders. In fact, Nell Minow, co-founder of Portland, Maine-based research firm The Corporate Library, says advocates of governance best practices may be off the mark on that point. Minow says that The Corporate Library’s research of 2,000 companies has not revealed a link between conventional best-practice governance structures and better shareholder returns, noting that “structures do not guarantee substantive and genuinely independent oversight.” Minow adds: “People are just grabbing at what’s intuitively compelling.”

Some investor groups are also grabbing onto single issues on which to base their withhold campaigns. This year’s 90 percent withhold vote at Calpers (including the vote against Buffett) was mostly triggered by the fund’s decision to vote against directors at companies that hire their independent auditors to perform other services. “It wasn’t an effort by Calpers to go after every company,” explains assistant executive officer for public affairs Pat Macht. “It was our decision to vote our conscience on the auditor issue.”

Voting their conscience, however, has some investor groups also straying well beyond traditional governance ground and into such areas as ethical pricing and workers’ rights. In response, many management teams have staged preemptive strikes, hoping to avoid media campaigns orchestrated by institutional investors. Coke and PepsiCo, for example, bowed to shareholder pressure this spring, agreeing to put together a report on the impact of the HIV epidemic on their business models (see “A Little Divine Intervention,” at the end of this article). And at Columbus, Ohio-based American Electric Power, management agreed to assess its own efforts to minimize its environmental liabilities — leading a state pension fund to withdraw its proposal calling for such action.

In preparing the report, however, American Electric Power CFO Susan Tomasky says, the power producer’s directors wanted to make sure they were mindful of the interests of all shareholders. But therein lies the rub. Out-of-court agreements between boards and activist investors — often hailed as wins for both sides — would seem to give short shrift to less-vocal investors. “For boards to function effectively,” argues Nordlund, “they have to be truly representative of all shareholders, not just groups of shareholders.”

Hide Your Lunch Money

These days they also have to placate their shareholders’ advisers — not always an easy task. Some believe ISS’s dominant position in the proxy-advisory business has led at times to an adversarial, almost belligerent attitude. “[ISS's behavior] has been outrageous,” asserts Sonnenfeld. “They’re like the neighborhood bully.”


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