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Lewis D. Gilbert

View from the ‘Gadfly’ Seat

Opportunities for Directors to Take Action

By Lewis D. Gilbert

Editor’s Note: Lewis D. Gilbert was a conspicuous presence at annual meetings for more than 50 years as one of corporate America’s most prominent shareholder activists. His activism was first sparked in 1932 when he attended the annual meeting of New York’s Consolidated Gas Co. and the chairman refused to recognize his questions from the floor. The following essay is an abridged version of a longer article that he wrote for Directors & Boards in 1984. He died in 1993.

The role of the outside director continues to grow in importance. With shareholder scrutiny ever more intense, director vigilance over management and company operations has never been more crucial. The following are several issues and concerns where I see opportunities for the independent director to take action for the greater benefit of the public shareholder.

Shareholders are concerned with the manner in which directors are elected. I believe that the majority of concerned holders do not want staggered systems of electing directors. Besides being less democratic, it is not necessarily a deterrent against a takeover bid or proxy contest.

A proper question for shareholders and directors alike is the amount of executive compensation. Many owners feel enough is enough. In no place is there more danger of abuse than with the stock option. This was proved once again only recently when one executive at a large corporation retired, cashed in his options, and made double digit millions. Should there be a limit of the amount of options one man can hold? Similarly, should there be some ceiling on pensions? If not, why not?

Another danger for outside director awareness is loans to officers. It was the intent of Congress in allowing the stock option to see that proprietary ownership increase, which is not the case if substantial options have to be sold to pay loans.

Stock ownership

The question of some stock ownership by outside directors cannot be dismissed. If there is one thing that infuriates owners it is to see that one or more directors do not own any stock. The argument for stock ownership has been strengthened by the Securities and Exchange Commission decision that a proponent of a resolution has to collectively own $1,000 worth of stock. What is sauce for the goose is sauce for the gander.

Outside directors should be rightly concerned when one man wants to be both chairman and chief executive officer. I agree with Courtney Brown, dean emeritus of Columbia Graduate School of Business, who has pointed out that such an executive is in effect passing judgment on his own work. In addition, as the company grows, it is too much for one man.

The annual meeting

Turning to the annual meeting, the outside director should be alert to see that the annual meeting is held in geographically convenient locations, either in the headquarters city or rotated as the case may be to accessible places.

Outside directors should listen carefully to the comments made by holders. They may not be always right, but they bring up issues that otherwise may not be known. More than one director has told this shareholder that I brought out things he had not been aware of.

Owners want to see their directors in the flesh at the annual meeting; they should not be hidden away in some obscure corner with their backs to the shareholders. And outside directors should listen carefully to criticisms of the handling of the annual meeting for errors to be avoided the next time.

At the recent RCA annual meeting, rotated quite properly to a hotel in Indianapolis, when I looked at the hotel’s bulletin board of “Day’s Events,” the RCA annual meeting was not listed. Another stockholder informed the meeting that a fleet of limousines was hired to take the directors from the airport to the hotel — a legitimate criticism, since RCA owns Hertz and Hertz cars should have been used.

Occidental Petroleum and Firestone came under criticism for refusing to allow reasonable discussion of management and independent proposals by insisting on lumping them in with the general question period. Specific proposals have nothing to do with general questions and are entitled to separate periods of discussion.

Post-meeting reports

The final observation I have for independent directors is to be alert to whether the company is keeping up with the ever-growing number of companies sending out fine post-meeting reports. These can be helpful to the board as well as the owners not able to attend the meeting so they have some idea as to kinds of questions being asked and answered.

There will always be room for further improvement, and that is why I like the way Campbell Soup and American Can have been taking the lead to see that school groups are invited to their annual meetings — as these are the future outside directors, shareholders, management, and employees of corporate America.