Who’s in Charge Here?

Listening to shareholders is easy. Making sense of their concerns is not.

On the eve of the 2008 elections, Richard Ferlauto, a union-pension-fund executive, noted that if the Democrats were to win big “it will be like Christmas for us.”

While the Democrats did, in fact, sweep Congress and take the Presidency, the ensuing weeks hardly matched most people’s idea of Christmas: the still-unfolding financial crisis saw the S&P hit a five-year low. But Ferlauto wasn’t talking about performance gains; he wanted to find a host of corporate-governance gifts under the tree, and he wasn’t disappointed.

The past two years have seen activist shareholders receive a sackful of goodies, from “say-on-pay” initiatives to clawbacks of ill-gotten bonuses to new rules on broker voting to more information about climate change, political spending, and other social issues. And then there is proxy access, the corporate-governance equivalent of a shiny new bike. True, some assembly is still required, but it has leapt off the wish list and now sits under the tree.

But as these governance gifts pile up, the question must be asked: Do shareholders need them, or even want them?

The answer is surprisingly elusive. Determining what investors truly want (beyond consistently healthy returns) is difficult because investor groups are a fractured, noisy, and widely divergent lot. They have different and sometimes competing interests, and different methods of communicating; some may not speak up at all.

CFOs and other senior executives may feel like parents trying to read the lips of children as they sit on Santa’s lap. “You might think that the people speaking the loudest are speaking for the larger group, but when you get down to it, the majority may not support [their concerns],” says Robert McCormick, chief policy officer at Glass Lewis, a proxy advisory firm.

“You have a very vocal minority that is doing most of the talking,” agrees Peter Clapman, chairman and president of Governance for Owners USA, a corporate-governance advisory firm, “and it can be difficult to determine if those same concerns are held by the broader shareholder base.”

What is often referred to as the modern shareholder movement has its roots in a single social issue: ending apartheid in South Africa. In the early 1970s, attorney Paul Neuhauser led a religious group in filing a proxy resolution urging General Motors to end its business in South Africa unless or until apartheid was ended. (That group has since morphed into the Interfaith Center on Corporate Responsibility, one of the most influential social responsibility investment groups and a prolific proxy resolution filer; its members filed 282 proposals this year alone.)

Other social issues, such as labor and environmental practices, became increasingly popular subjects for shareholder proposals, but they were largely ignored by companies; most institutional investors didn’t even bother to vote.

It wasn’t until the 1980s, during the heyday of corporate raiders backed by Michael Milken, that proxy resolutions (proposals that actually make it on to the ballot; often proposals are either addressed or ignored by companies without getting to the ballot stage) were embraced as a way to force companies to put their takeover defenses up for a shareholder vote. Shareholders embraced these resolutions because they often boosted corporate values, and soon the proxy resolution became a powerful tool for shareholder activism.


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