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Shareholder democracy: Led by an unlikely activist, the years-long push for shareholders' rights is suddenly gaining steam. Is CEO clout in the boardroom seriously at risk?

In the annals of corporate reform, there may be few more unlikely crusaders than Robert A.G. Monks. Son of New England aristocrats, former Reagan administration official and former chairman of The Boston Company, a global asset-management firm, Monks is a founder and spiritual leader of the movement for shareholder democracy. His biographer described him as "a traitor to his class."

After years of preaching to relatively deaf ears, Monks suddenly finds himself at the forefront of a rising debate. The Securities and Exchange Commission, sharpening its oversight in the aftermath of Wall Street scandals, has issued a report suggesting new rules to give shareholders more power to determine the makeup of corporate boards--a potentially strong blow to the power of CEOs. In so doing, the agency has recognized that election contests can cost shareholders large sums of money by requiring them to prepare and disseminate proxy materials that comply with SEC rules. The report, issued in July, suggested allowing shareholders, under certain circumstances, limited access to companies' own proxies. SEC Chairman William Donaldson recently said such a change is "long overdue."

Monks is pinching himself, almost afraid to believe that the cause he's championed for so long is now gaining steam. "I keep wondering whether it's really a ploy," Monks says. "Are they putting forward these ideas about shareholder involvement just to come up with some incredibly bureaucratic process?" Then again, he says: "There was an easier way for Donaldson. He didn't have to raise this issue. He didn't have to bring it up, but he did. So at risk of turning out to be naive again, I'm very much a fan of what is being done."

Monks is hardly an anti-capitalist. A true entrepreneur, he multiplied the value of The Boston Company; founded Institutional Shareholder Services, the for-profit shareholder advocacy group, and sold it at a gain; and also founded the activist Lens Fund, which did so well that George Soros invested alongside him. It would be hard to imagine anyone more solidly ensconced in the establishment. He even married a granddaughter of Andrew Carnegie II.

So it's fitting that Monks' campaign for shareholder power isn't about placing the Rainbow Coalition in the boardroom or saving endangered whales. It's about putting more money in owners' pockets, not those of executives. "If you needed any evidence that the CEOs really work for themselves and aren't monitored by anybody, the pattern of CEO pay should remove any doubt," argues Monks. All too often, he says, chief executives have cashed whopping paychecks not because of, but in spite of, their performance. Monks estimates that the past decade or so has seen the biggest wealth transfer in peacetime history: roughly a trillion dollars in cash and stock from owners to CEOs.

Much of what Monks has to say seems to come right out of Corporate Governance 101. He says that managers ought to work for shareholders, that boards are supposed to represent shareholders and that shareholders should have the right to pick the representatives they think are best. When companies destroy value instead of build it up, he says, shareholders deserve the right to do something about it--not just to sell their stock, but to change the directors and the managers.

A Hobson's choice

0 f course, that isn't how real companies work. As Monks discovered in his run for a board seat at Sears in 1991, it's expensive, difficult and personally risky for shareholders to challenge CEO power, even when the CEO is running a company into the ground. "The board is now a fig leaf, and the evidence is the pattern of having the CEO be the presiding officer of the board," Monks says. "It's impossible for someone to monitor his own conduct." Shareholders who tried to contest board seats at any number of other companies have learned the same lesson.

On top of the momentum it gained from the SEC report, the push for shareholder democracy received a boost in late August from former SEC Chairman Richard Breeden. As part of his role as court monitor for MCI, Breeden published 78 recommendations for the bankrupt telecom giant, including provisions that he recommended all CEOs consider carefully such as allowing shareholders to nominate board candidates, providing for contested elections to board seats and requiring shareholder approval of extraordinary pay packages. Breeden began his report on MCI with the famous quote from Britain's Lord Acton to the effect that "absolute power corrupts absolutely."

When staunch members of the financial establishment start speaking the same language as labor unions and reform groups, it suggests that CEOs face a Hobson's choice: share power voluntarily or see it taken away. In an interview, Breeden says he personally opposes more regulation, but believes it may be inevitable unless CEOs change their ways. "If you really want to avoid regulation, the single best thing you can do is exercise responsible self-restraint," he says. "If you fail to do that, you better not complain when you end up getting more regulation."

Advocates for shareholder rights argue that boards will become independent from and superior to management only when directors owe their jobs to the shareholders, not to the CEO. In a speech he gave in March 2002, Federal Reserve Board Chairman Alan Greenspan put the issue in a nutshell. "Few directors in modern times," he said, "have seen their interests as separate from those of the CEO, who effectively appointed them and, presumably, could remove them from future slates of directors submitted to shareholders." However, no fan of change, Greenspan went on to say that any other arrangement would risk creating competing power centers within corporations.

Passions on the management side of the debate are equally strong. Henry A. McKinnell, chairman and CEO of Pfizer and co-chairman of The Business Roundtable, summarized some of the most compelling arguments against reform in a letter to the SEC. In the first place, he said, new listing standards at the New York Stock Exchange and Nasdaq already provide for independent directors and that allowing shareholders direct access to the company proxy would conflict with those standards. Further, McKinnell argued, offering shareholder access to the company proxy might prevent boards from appointing candidates with a desired expertise. He also noted that shareholders can nominate candidates on their own proxies.

Monks and other shareholder advocates scoff at such arguments, seeing them as an indication that CEOs are out of touch with the public mood. "There's a place called Planet CEO that doesn't seem to fully get what's going on here," says Alan Cleveland, attorney for the New Hampshire Retirement System. "They just don't seem to understand the degree of outrage." Public feedback to the SEC's recent actions would seem to bear that out. Of the 690 public comments the SEC received before releasing its July report, the "vast majority" supported reform, the agency said. Only a handful of respondents registered opposition, 10 corporations, several law firms and a few (mainly business) associations.

Will the status quo survive?

The stark polarization of responses suggests that a new front in the battle for corporate control is opening up. "This goes to the heart of power," says Richard Koppes, former general counsel of the California Public Employees' Retirement System, or Calpers, and a board member of Apria Health Care and ICN Pharmaceuticals. "Of course, we're not going to throw the whole system out. If you read some of the reactions, it seems the inmates are going to seize control of the institutions. But these are not the inmates. These are the owners, the people who own the companies, and they care about them as much as the CEOs. A little more checks and balances is what we're talking about here."

What are the chances of real change? With a wary eye to the immense financial and political power that Corporate America can muster, many shareholder advocates admit they face a steep path to reform. The issue has come before the SEC on several occasions in the past, notes Jayne W. Barnard, a professor at William & Mary Law School who has studied the history of such battles. During the takeover battles of the 1980's, abuses like greenmail and poison pills even led Congress to consider legislation to enfranchise shareholders. But when the scandals of the moment died down, so did the prospect of substantive reform.

Bob Monks predicts that CEOs, armed with lawyers and lobbyists, will do all they can to defend the status quo. "One would think that the first place opponents would turn would be the White House," he says, adding that, based on recent history, they would likely find a sympathetic ear. He also believes that The Business Roundtable might bring a suit, claiming the SEC has exceeded its authority.

It might not go that far, however. Even if the SEC adopts a rule allowing shareholders to nominate hoard candidates, it could have limited effect. The July report suggested restrictions on which shareholders would be allowed to nominate candidates and under what circumstances. For instance, shareholders would need to have a 3 percent stake in a company to make a nomination, and then only after a "triggering event" in which the company ignored shareholder views. As shareholder advocate Jim McRitchie, editor of, notes, that would effectively require shareholders to form broad, unwieldy coalitions just to muster a nominating quorum, because even the largest institutional investor rarely owns 3 percent. He and others also believe that allowing shareholders to nominate candidates only after such a "triggering event" would mean closing the barn door after the horse had already run away.

Another hot potato, it seems, has landed squarely in SEC Chairman William Donaldson's lap.

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Title Annotation:Corporate Governance
Author:Millman, Gregory J.
Publication:Chief Executive (U.S.)
Date:Oct 1, 2003
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