An October Surprise That Has Shareholders CheeringJudith H. Dobrzynski
Oct. 15, 1992: Note that date. It won't be as momentous as, say, Black Tuesday, 1929, or Bloody Monday, 1987. But in a month fabled for weighty events in the business world, that sunny Thursday in Washington should go down as a red-letter day--at least in the annals of shareholder activism.
And that's not because of the new Securities & Exchange Commission rules on the disclosure of executive compensation--which got all the front-page headlines and landed Chairman Richard C. Breeden on network television. Rather, it is the SEC's new proxy rules that should prove more far-reaching. For nearly 40 years, shareholders unhappy with the way companies operate or perform have been muted by federal rules that favored management. Now, the SEC has handed shareholders a megaphone. Moreover, says John C. Wilcox, chairman of proxy solicitors Georgeson & Co.: "This is a huge psychological boost to shareholder activism and to the corporate governance reform movement."
VOTING POWER. Under the rules, pension funds, financial institutions, and individual investors alike can now sound off in several new ways. They can talk to one another about their stakeholdings without meeting burdensome filing requirements or getting clearance in advance from the SEC. They can announce how they will vote on proposals and on directors, with an eye to swaying others. They can more easily vote for, or run as, individual board members that are not part of management's slate. And they can gain access to corporate shareholder lists. As a result, shareholders will be able to muster support for their views without actually soliciting proxy votes. Better yet, since they are now able to confer, they can go to management and boards as representatives of a block of shareholders before an issue turns into a confrontation.
These changes raise two questions: What will investors do with their new power, and how will management react? If both parties act responsibly, the SEC may have launched a positive new era in American management-shareholder cooperation. After all, the goal of most activist investors--largely the huge public pension funds that find it costly to move in and out of stocks--is getting better corporate performance. That's hardly something managements or boards oppose.
In the past few years, some activist institutions have tried discussing matters first, before confronting managements with shareholder resolutions. Some companies agreed; many did not. Ideally, chief executives should now be more willing to listen to investors. Since better-informed investors may be more patient providers of capital, the CEOs of poor performers may even want to initiate a dialogue with major investors to apprise them of their predicament and their strategy for resolving it. There should be room for "blunt discussions," as Harvey J. Goldschmid, professor at Columbia University School of Law, puts it.
Investors, meanwhile, should be better prepared for such talk. Since many big funds hold stakes in hundreds of companies--far too many for their staff to know well--they should share information, divvying up targets for research and passing along their assessments. And shareholders should continue to narrow their focus to performance issues, instead of ideological items, such as forcing the chairman and CEO jobs to be split, as they once did. That way, shareholders and executives are at least talking the same language. "Now that our criteria are 99% performance-based, companies are coming to the table much more quickly," reports Sarah A.B. Teslik, executive director of the Council of Institutional Investors.
FINESSE. But what if investors get no satisfaction from their discussions with executives? They should again coordinate as they escalate their activity: seeking meetings with independent directors, offering shareholder resolutions, and organizing "aye" votes for those resolutions and, finally, "nay" votes against directors. More drastic steps include nominating a representative to a board and voting for a slate of dissident directors.
Corporate governance experts are divided on whether such extreme tactics will now become more common or less. But they agree that things should never sink to that level. Because boards function best as collegial units, not adversarial ones, minority representation may not be productive. In any case, it can be finessed. A CEO could, for example, move major board activity to its executive committee, from which the dissident is excluded.
It's all the more important, then, that executives, directors, and investors respond positively to the SEC's new proxy rules. Nearly 60 years ago, the bible of value investors, Graham and Dodd's Security Analysis, noted that "the choice of a common stock is a single act, its ownership is a continuing process." Until Oct. 15, the old SEC rules made responsible ownership difficult, if not impossible, for most shareholders. Executives often railed against shortsighted investors who sold out too soon and forced them to cut their investment horizons, but they gave investors no other way out. Now, in addition to the so-called power of exit, and thanks to the SEC, they have the power of voice.