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Column
In a democracy, with rights come responsibilities. Let’s pay some mind to what should be required of the dissident shareholder class. By C. Warren Neel Few would deny that most if not all institutions in a democratic society should reflect the tenets of democracy. Therefore we might conclude that a corporate entity in the public domain should be held to those same standards. Being a representative democracy, when the question is, “Should shareholders have access to their representatives, the board members?” it is obvious what our position should be: Let there be complete access. A simple construct of the issue, and I deduce a simple answer. But as we know, it is not that simple. My experience in boardrooms is that shareholder requests are taken seriously but, admittedly, some more seriously than others. Most boards know there are different motives for shareholder requests, depending upon the source of the proposal. Not all motives are obvious. There may be a request to have the company place on the proxy a resolution to annually inspect offshore factories for labor issues. The source of the request is a union pension fund that holds but a few shares of company stock, has little track record of holding the stock for more that a year or so, and has a drive to unionize one of the company’s plants. Is the motive “pure”? Maybe, and maybe not. Hidden Agendas That one has an easier-to-discern motive. What about those shareholder requests that come from pension funds in states that have defined benefit programs? In several of these that have made it into the public press, the not-so-hidden agenda is a state treasurer running for public office. It certainly makes me wonder if the motive behind the shareholder request is the same as that of an investor who is at risk, rather than state employees without risk. It also makes one think that this “shareholder” activism is but a plank in a political campaign. Another consideration by many boards today is an assessment of how Institutional Shareholder Services might opine. ISS has an important role in activism with, among other things, its awarding of a governance quotient score and its mediation role. Take poison pills as an example of a shortcoming noted in the quotient. “Get rid of the pill” thus becomes the activism theme. Indeed, more and more companies are getting rid of pills. Yet the evidence I have seen suggests that if a company is in an acquisitive environment, particularly in an industry that is consolidating, the values are higher to shareholders if some measure of control is in management’s hands to do a transaction. If you are a board member in an industry with significant M&A activity, completely dropping all defenses may be a poor choice for shareholder value. In that situation, board members may find they are conflicted by the desire to drop the pill and the need to fulfill their obligation to demonstrate good business judgment. Short Sellers and Takeover Artists I would be remiss if I did not also suggest boards are increasingly concerned with short sellers and the activism movement. A company receives a copy of a letter to the SEC suggesting management and the board misled the investment community in a recent disclosure. A detective agency is hired to trace the source of the letter. As it turns out, the short seller was part of a shareholder movement. The company, meanwhile, dispatches an attorney to the SEC to verbally communicate the company’s response, since any written response would trigger a disclosable event -- exactly what the short seller wanted. Does this sound farfetched? It happens, as boardrooms are increasingly aware. I look at the aging group of takeover artists who continue to practice their trade after 25 years. They don’t run companies. They never have. They buy and sell companies. If they serve a purpose at all it is to draw attention to a strategic issue that should be given consideration. Maybe they add value in that case, but meanwhile in many boardrooms today they are the poster child for questionable motives. Having said all this, shareholder activism is a good thing. Cronyism, good-old-boy boards, and icon CEOs have not served shareholders well. When golf scores become part of the board selection process, every shareholder should be concerned. When a divorce settlement is more transparent than the proxy’s presentation of compensation, shareholders should be irate. Come to an Acceptable Accommodation What we must do is find an appropriate accommodation to better reflect a democratic society. We could easily trade one devil for another if we try to make shareholder activism mirror exactly the political process. Do we want to turn a representative democracy into one where governing becomes a series of referendums? Should we choose the latter path, we are likely to find CEOs spending even more time with dissident shareholders and lawyers than with customers and running the company. If we are going to demand that companies open up access to the proxy -- and not just for voting on directors -- should we demand that shareholders and fund managers demonstrate some responsibility after the proposed changes are implemented? What should be required of the dissident shareholder class? If a fund opts to become the dissident shareholder regarding the board, and wins a seat or a change in the board composition, should there be a requirement that the fund must hold a percentage of the shares they voted for a given period of time? For those funds that “rent” shares for purposes of a vote, should they publicly disclose such and be subject to a similar holding requirement? The point is, what should be the shareholders responsibility in activism? If we support shareholder activism as a principle founded in a democracy, then we should likewise support shareholder responsibility to exercise that freedom to the benefit of all shareholders -- not just a few. |
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Warren Neel is co-founder and executive director of the University of
Tennessee’s Corporate Governance Center (http://www.corpgovcenter.org).
He recently returned to the university after serving as commissioner of
the Tennessee Department of Finance and Administration. He had
previously been dean of the College of Business Administration. He has
served on nine corporate boards in his career and is currently a
director of an NYSE and a Nasdaq-listed company. He can be contacted at
cneel@utk.edu. Copyright © 2006 Directors & Boards, P.O. Box 41966 Philadelphia, PA 19101-1966. All rights reserved. Contact the webmaster. < Privacy Notice > |
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