Just vote "no." (Technicallly speaking)

"How do you enforce corporate discipline [without the threat of corporate takeovers]?" asked former securities and Exchange Commissioner and Stanford University law professor Joseph A. Grundfest, declaring the takeover era over.

Not all publicly traded corporations are well managed, Grundfest declared, "and not all managements are competent." Using RJR Nabisco as an example of a company that had "the barbarians inside the gates" prior to its takeover, Grundfest reviewed several proposals for improving poorly managed companies, and presented his proposal to "just vote no" or "just don't vote."

One suggestion for improving the management of a poorly achieving company calls on institutional investors to identify board nominees and to strive to elect these independent directors to corporate boards. However, Grundfest pointed out, these electoral measures may be stifled by new interpretations or applications of poison pill provisions. Also, potential dissidents may decide that the economic risks involved in a pure proxy contest outweigh the rewards.

Another proposal calls for a five-year plan: Every five years there should be an opportunity for a proxy contest with no defensive tools allowed to help management stay in place. Performance would be measured against pre-established goals, and a determination of success or failure would depend on how well the corporation achieved its goals.

As a practical matter, said Grundfest, this would take massive legislative and regulatory change to implement. Further, five-year plans are usually modest because management does not want to set goals too high,

The legitimacy of the board of directors and management comes from the shareholders, Grundfest stated. The board has no legal claim except by election, and management is selected by the board. However, the corporate voting process, according to Grundfest, is "designed to keep the shareholders' role as minimal as possible so that boards of directors maximize the benefits of incumbency and maintain the appearance of consent by the governed while eliminating the possibility of any dissent by those whose consent is actually required,

"A simpler, more elegant, and possibly more evocative strategy that might be able to shake up complacent boards sheltering barbarians inside the corporate gates," he declared, "is just vote no,' or just don't vote!" This does not require that shareholders identify alternative candidates for a corporation's board, he continued. It does not require detailed information about individual members of a board.

Using this strategy, shareholders who are dissatisfied with the management of a publicly traded corporation should either mark their proxies to withhold author to vote for management's proposed slate, or take steps to assure that their shares are not counted toward the quorum necessary in order to convene a shareholders' meeting, he explained. "The effect is largely symbolic," but it is clearly a vote of no confidence. "How many boards of directors would want to be embarrassed by magazine articles that name them as one of America's most mismanaged companies as selected by their own shareholders?" Grundfest asked.

In response to the unasked question of what good a symbolic gesture would ultimately be, Grundfest's most optimistic hope is that boards might actually try to make internal changes to improve company performance. Second, the clear vote of no confidence might incite external forces to attempt a takeover or proxy contest. If nothing happens, this approach at least costs nothing, he said. This approach requires no new legislation, he pointed out, and management cannot take this tool away from shareholders, because by law it must send ballots every year.

Grundfest challenged institutional investors in the audience as possibly having an obligation to consider voting no' in those situations where they are dissatisfied with the management of a corporation. Under ERISA, the vote attached to a share is a plan asset, and if it is a plan asset, the fiduciary has an obligation to maximize the value of that asset. If there is a possibility that by voting 'no' you might improve management and increase the value," you have that obligation, he declared.

Institutional shareholders might consider the task of selecting poorly managed companies as impossible because of the number of different stocks held, he conceded. "You can easily eliminate more than half of the companies in the portfolio," Grundfest said, citing Morgan Stanley and Merck as well-managed companies. He advised concentrating on the bottom-performing 10 to 20 percent of companies on an industry basis and comparing their stock price performance over the past few years to others in its industry.