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Feature

Norman R. Augustine
Former Chairman and CEO
Lockheed Martin Corp.

The Annual Meeting: An Exercise in Corporate Democracy or Corporate Futility?
The current emphasis on enhanced corporate governance affords the perfect opportunity to revise nonproductive annual meeting practices.

Have annual meetings, born as the embodiment of corporate democracy, become an anachronism from another era, a Theater of the Absurd, wherein anyone with $50 or so can be guaranteed a stage, a captive audience, and a moment in the spotlight ... the corporate world’s version of karaoke?

Arguments in favor of continuing these events, hopefully in a more constructive fashion than has too often become the case, include the observation that the democratic process indeed forms the underpinning of American business and what could be more democratic than an annual meeting in which all shareholders are given an equal opportunity to confront those who in fact are their employees?

Further, it is hard to imagine that there could be a worse time to take a step away from direct shareholder involvement in corporate governance than on the heels of Enron, WorldCom, Tyco, et al. This alone is enough to frighten most prudent CEOs from supporting any proposal to repair the annual meeting.

Also, some annual meetings actually are productive -- Berkshire Hathaway’s gatherings being Exhibit One in this regard. But, then, how many CEOs have the luxury of having tickets to their meetings sold for nearly $100,000 ... and, for that matter, how many CEOs have as much wisdom to share with their shareholders as does Warren Buffett?

Gone Awry
Arguing against continuation of these displays of corporate-democracy-gone-awry include the facts that when such meetings are called to order, the CEO usually has 80-90 percent of the votes to be cast already safely stuffed in his or her pocket; that 99 percent of the time devoted to the meetings is consumed by holders of less than 1 percent of the shares; and that, in this age of global business, almost all the attendees happen to live within 20 miles of where the meeting is being held -- which itself was probably selected either because that’s where the corporation’s founder was born a century ago or because the current chairman felt that surely no one would attend a meeting in Fargo, North Dakota.

Indeed, most of those who do attend the gatherings seem to be either retirees enjoying a reunion, union members seeking to circumvent the collective bargaining process by negotiating a new contract directly with the CEO in front of the media, disgruntled former employees, reporters seeking oddities for the “Style” section, rebels with a (social) cause -- usually unrelated to management’s ability to redress their grievance - or gadflies seeking their 15 minutes in the sun. No self-respecting large shareholder would normally be seen dead at an annual meeting, nor would most analysts.

But the really bad news is that staging one of these extravaganzas can easily cost over a million dollars -- and that assumes there is no value to the time devoted by the members of management whom the CEO has compelled to be present, in spite of their impassioned pleas that they needed to be with their sick Aunt Minnie, their injured dog, or even their dentist, having a root canal.

Into the 21st Century
With all these flaws, it must be admitted that annual meetings are, or at least could be, an important venue for institutional investors and individual shareholders to constructively question and interact with those to whom they have entrusted their savings.

The challenge is thus to drag the corporate version of the 19th century town meeting into the reality of the 21st century global marketplace. Fortunately, modern technology makes this entirely feasible.

But the correct answer is not the obvious one, which is to videoconference or webcast the annual meeting. This would merely convert what is now a local exercise in gaining 15 minutes of fame into a full-fledged Olympic cybersport.

A Modest Proposal
The proposal I would like to offer is actually quite simple, and is intended to permit broader shareholder participation in corporate governance and to enable a richer and more constructive exchange of information between a firm’s owners and its management -- and to do all this at less cost than is being devoted today. The process would consist of five steps:

First, management would issue an annual report, both on the Internet and, for those who wish, in hard-copy. The report, in addition to the usual financial information and CEO letter, would contain a plain-English presentation of management’s view of the top 10 issues facing the firm -- as well as management’s plans for dealing with them.

Second, interested shareholders would submit to the firm’s outside (and presumably independent) auditor questions and comments that they would like to have addressed by management.

Third, the (independent) outside auditor would compile the shareholder submittals to eliminate duplication and irrelevance, and submit a highly consolidated set of questions and comments to management.

Fourth, management, thus granted the time needed to carefully consider the content of its reply, would respond to the questions and comments which had been posed.

Fifth, shareholder voting would take place by electronic mail or snail mail, again according to each shareholder’s preferences.

It would seem that the current emphasis on enhanced corporate governance affords the perfect opportunity to revise nonproductive practices that were established in the distant past when firms were smaller and owned by a modest number of individuals who were often known personally to management and frequently lived in close proximity to the firm’s headquarters.

Norman R. Augustine is the former chairman and chief executive officer of the Lockheed Martin Corp. He is a member of the boards of Black and Decker Corp., ConocoPhillips, and Procter & Gamble Co. He is or has been a trustee of Johns Hopkins, MIT, and Princeton, as well as Colonial Williamsburg, and is a former chairman of the American Red Cross and the National Academy of Engineering. He is a member of the editorial advisory board of Directors & Boards.

A longer version of this article appeared in Boardroom Briefing: The Future of Annual Meetings, published by Directors & Boards in Fall 2004. A copy of the briefing can be downloaded here.