Today’s WSJ includes an editorial that argues strongly against the current shareholder democracy movement. Occasioned by an upcoming decision, next week, regarding how director elections in US-listed corporations will be regulated, the piece points out that 25 of the world’s 30 largest businesses are in the four countries (the US, Japan, France, and Germany) that currently have the most restrictive regulations regarding the ability of shareholder activists to influence and even control the selection of board directors and the deliberations and actions of these bodies. Conversely, countries with “overly” shareholder friendly rules are demonstrably less able to generate world-beating businesses.
The author argues strenuously that the SEC should reject the proposal that, he believes, would dilute the authority, power, and freedom of action of the historically strong boards of this country, and that would inhibit their important contribution to the dynamic, boldly innovative, and ever-more productive American business community. He gives a few examples of the damage that some recent shareholder uprisings might have caused.
But the underlying question remains: why does this shareholder activism exist, and why is it rearing its head now?
It is useful to bear in mind that there are two causes of shareholder activism. One is the effort to increase share value. This is often undertaken by large individual or institutional shareholders who want to force particular share-price-enhancing action by management, such as divesting a firm of unproductive assets, or buying back shares with under-used cash reserves.
The other might be referred to as interest-group activism, and is not particularly concerned with share value or business competitiveness at all. What happens here is that advocates of various causes mobilize to have someone representing their interest elected to a major firm’s board of directors. They may establish positions as shareholders and pursue this course on that basis, or they may simply use standard public-awareness campaigns to attempt to influence the decision.
This form of shareholder activism is being seen with increasing frequency because advocacy organizations of various types - from human rights to environmental groups - are realizing that, particularly with globalization, many firms are so influential - in consumer and labor marketplaces, supply-chain activities, exploitation of raw materials and land, and with government policy around the world - they can best advance their own causes by working through - rather than against - these firms.
Some groups, such as state pension funds, university endowments, and the like, can sometimes be found in both categories. Large investment pools like these have pressure on them to perform well for their beneficiaries, and they often use the weight of their considerable ownership positions (often by threatening to liquidate those positions), to exert influence over management decisions. But sometimes, the influence being exerted on management decisions is of the second type - advocacy or cause-related - because of the direct political pressure that funds like these often feel.
It should be noted, also, that class-action lawsuits, while certainly a form of shareholder activism, are also often generated by the law firms themselves, which seek out shareholders to participate in them, rather than by shareholders attempting to promote particular share-value-enhancing management behavior.
The dilemma for the corporate governance debate today is only highlighted by considerations such as these. In the days when shareholders were largely content to drift in anonymous somnolence, boards (and managers) pretty much had free rein. That is, when owners either couldn’t or didn’t communicate their ambitions and intent to directors, the latter were perfectly free to determine on their own what these might be.
But today that situation is changing. Shareholders are finding ways to break the bonds of anonymity, to find their voices and to insist they be heard. Directors must address their obigations to owners and become more accountably focused and professional in the performance of their duties. This includes gaining control over management. If they don’t, there will be no hiding behind regulations - those troublesome owners will eventually storm the gates.
That is far from an ideal situation, either. So, there is really only one choice: Directors need to study anew their roles and how to conduct themselves in the discharge of them.
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