Contributed by Jilaine Hummel Bauer, Bauer Consulting
If you read the news story run under the headline, “Woman of Steel Gives Top Brass a Hard Time,” about an activist shareholder who objected to executive compensation and introduced a “say on pay” proposal at an annual shareholders meeting of a large, prominent U.S. public company, you might think the story had run yesterday. Would you believe the story actually ran in Life Magazine back in March 1950?
Wilma Soss, the story’s protagonist, introduced the proposal at a U.S. Steel shareholder meeting. Founder of The Federation of Women Shareholders of America, Ms. Soss espoused the goal – now broadly supported not only by investors, but also by a growing number of companies, governments and regulators around the world – to increase the gender diversity of corporate boards.
Her campaign literature featured Matisse’s painting Girl Asleep with the caption, “AWAKE! You own 70% of U.S. Private Wealth!” Frustrated by company management’s “old fashioned thinking,” she reportedly threatened to appear at a future shareholders’ meeting in a bathing suit – circa 1902!
Many who support “say on pay” shareholder proposals and increased board diversity will relate to Ms. Soss’ frustration, and some might even consider the tactics she threatened at future shareholder meetings and Congressional hearings. However, there are events –albeit not as eye catching – from 1950 to present day that are notable for their effect on corporate governance in the United States today.
Increasing Shareholder Influence Since the ’50s
From the 1950s through the 1970s, CEOs dominated US corporations. Few independent directors populated corporate boards and the interests of shareholders (most of whom were individuals) were largely ignored. Business was conducted principally through large conglomerates, ownership structures were not market efficient and resources were underutilized spawning opportunity for takeover artists in the 1980s. The lack of regard for independent directors was captured in the remark of the CEO of one prominent company in the 1960s: “A really good board is one that only reduces the efficiency of the company by 20 percent.”
In the 1980s, the ill advised diversification of the previous era was reversed and excess capacity eliminated through hostile takeovers and leveraged buyouts led by hard charging personalities like Henry Kravitz. Management of underperforming companies ignored shareholders at their peril.
Anti-takeover activity subsided in the early 1990s, however, due to legislation, tight credit markets and the collapse of the high yield bond market. At the same time, share ownership was increasingly concentrated in the hands of institutional investors.
Compared to only 8% of share ownership in the 1950s, institutional investor ownership had grown to 53% by 1990. A subset of these investors quickly adapted the tactics employed by LBO artists in the 1980s to achieve their goals ushering in a new era of investor activism. Closely scrutinizing corporate governance practices and pressuring boards to be more accountable, some institutional investors were even willing to pay a market premium for companies with good governance.
Increased shareholder activism was aided by regulatory reform in 1992 with the relaxation of SEC proxy rules permitting greater communication among shareholders without being encumbered by the delay and expense of proxy filings. Proxy reform favoring investors continued into the current decade with the adoption of new SEC rules permitting electronic proxy voting in 2000 and proxy access rules making it easier for shareholders to nominate their own director candidates were proposed twice before being proposed a third time in 2009.
Also earlier in this decade, corporate fraud led to a dramatic expansion of federal regulatory power over corporate governance with the adoption of Sarbanes Oxley and new exchange listing standards. Some states also modified their corporate statutes to be more shareholder friendly.
What’s Next? More Diversity, Better Governance
Research on various aspects of good corporate governance began emerging in the late 1990’s and during this decade became widely published and then cited first by institutional investors and others advocating for better governance and then the media and regulators. Studies on board diversity and gender diversity, in particular, found positive correlations between more diverse boards and company financial performance. They also found that companies with more diverse boards benefited in other meaningful ways as did their employees, shareholders and communities.
Recently, members of the Securities and Exchange Commission have publicly espoused the benefits of diversity citing this research. This has led to the elevation of diversity as a key governance reform measure through adopted or proposed rulemaking in the United States and around the globe.
In the United States, for example, beginning in 2010, both public companies and mutual funds are now required to disclose in their proxies whether their boards consider diversity when nominating directors and, if so, they are required to discuss their assessment of the effectiveness of those policies. Also for the first time they are required to disclose the skills and experience of individual nominees and directors that they believe make them qualified to serve.
Elsewhere, Norway was an early adopter in 2003 of what has become known as a “quota” rule requiring all public companies to have at least a minimum number of women (40% in the case of Norway). The Netherlands and Spain have adopted similar requirements and France is currently considering adopting a rule of the same sort. Other countries, such as the United Kingdom and Australia, have adopted corporate governance principles pertaining to gender diversity that apply to all listed companies which require that they comply or explain why they do not subscribe to having a board satisfying certain, explicit gender diversity requirements.
These developments – together with unrelenting pressure from institutional investors and from retail shareholders newly empowered by a rule preventing brokers from voting their shares absent instructions in uncontested director elections – have moved corporate governance to a tipping point.
Top brass at today’s companies who ignore shareholders and, increasingly, directors, do so at their peril. With greater accountability on the part of management and boards, hopefully there will be no need to resort to 1902 bathing suit attire at future shareholder meetings.
Ms. Bauer, Chair of the Outreach Committee of InterOrganization Network, provides consultancy and project management services to complex and matrixed organizations in the for profit, non profit and government sectors helping clients drive strategy, manage risk, create new revenue opportunities, reduce costs and solve problems when there is no roadmap or blueprint. She specializes in board governance, compliance and institutional development.
Previously, Ms. Bauer served as an executive officer, general counsel and compliance officer in the financial services industry where she continues to maintain an extensive personal and professional network.