Who owns the corporation? And who
should control it? Corporate governance can, at the most
rudimentary and abstract level, be distilled to those two questions --
that is, if you can tune out the high-pitched debates about proxy access,
executive compensation and other issues driving regulatory reform. If you
adjudicated those seemingly benign questions in a court of law, you might
have Ira Millstein representing shareholders and Martin Lipton making
management's case. This is not new. Millstein, 83, and Lipton, 79, staked
out their positions on the legal yin and yang of governance 30 years ago,
and their distinctly different worldviews on the role of corporate boards
and shareholders encapsulate the schools of thought that still define the
Millstein, a senior partner at Weil,
Gotshal & Manges LLP, mostly takes up the orthodox position, though
his views on board oversight were rocked a bit by the financial crisis.
Still, he is as close to a founding father of the shareholders-as-owners
model as you can get, arguing that stockholders own companies, asserting
power by electing boards to ensure that companies are managed in their
best interest. It's an appealing power-to-the-people message, particularly
fresh off of a financial crisis that heaped a mountain of pain on Main
Street. Leading shareholder democracy advocates such as Harvard Law
School's Lucian Bebchuk, and Robert A.G. Monks and Nell Minow, co-founders
of independent research and rating firm the Corporate Library, take
a similar view.
Lipton, by contrast, is a powerful and
still-ubiquitous proponent of stakeholder theory, at least in corporate
circles. As Lipton sees it, management and directors should run business
as they see fit, considering the interests of creditors, employees,
customers and the community, in addition to shareholders. His view was
shaped, in part, he says, by Adolph Berle, who advised Lipton on his 1955
thesis on corporate law. Berle, a Columbia Law School professor and FDR
Brain Truster, co-authored with Columbia economist Gardiner Means the 1932
classic, "The Modern Corporation and Private Property," which warned
against unchecked management power.
"What people don't quite understand was
that Berle was most interested in the social responsibility of companies,"
says Lipton. "His principal interest wasn't the protection of
shareholders. It was the protection of society. Making sure corporations
complied with the social legislation that he was about to be so heavily
involved in in the early days of the Roosevelt administration. In large
measure, Berle came to be a proponent of constituency theory."
That position has shaped the thinking of
governance skeptics including Yale Law School's Jonathan Macey and Charles
Nathan, a partner at Latham & Watkins LLP, who believe that the
market is an effective check on corporate power, especially given that a
large percentage of shareholders either don't vote or don't monitor
corporate affairs closely.
"The reality is that most shareholders
don't want to be bothered in voting," says Nathan. "To motivate them, we
give them a document called a proxy statement, which no sane person would
read and the most intelligent people can't understand. And for the lawyers
who are forced to write all this gibberish, it is a totally useless
destruction of forests. That's the reality."
To be sure, corporate governance is not
neat and tidy, and in the backwash of the financial crisis the arguments
and alignments of corporate governance have come under stress. Still, over
the past 30 years or so, a dense array of public and private institutions,
firms and academic centers has grown up dedicated to the pursuit of better
"corporate governance," a general term that is almost always attributed to
the pursuit of shareholder pre-eminence. This corporate governance
complex, with major outposts across the country at research universities,
the federal government, major pension funds and even public companies,
generates considerable intellectual and financial firepower. In the pages
that follow, we map that complex, describe its movers and shakers and lay
out some of its fissures, schisms and alliances.
The truth is, governance has never been
as neat and simple as many of its proponents, and most politicians,
suggest. And the framework in which widespread corporate ownership
(shareholders) and relatively narrow control (boards and management)
should co-exist has been vigorously debated since Berle and Means first
considered it decades ago.
Origins are always murky, but the start
of the current era of governance clearly belongs somewhere in the
recessionary '70s. Prompted by reports in the mid-1970s of illegal
payments by U.S. corporations to foreign executives, the Securities and
Exchange Commission held a series of public meetings on what was then
called corporate accountability. Soon after, the SEC adopted some of the
earliest rules about corporate committee disclosures, and in 1977 Congress
passed the Foreign Corrupt Practices Act. Known best for prohibiting
bribes to foreign company officials, FCPA also includes internal control
provisions, a precursor of sorts to Sarbanes-Oxley.
That regulatory momentum didn't last.
"When Ronald Reagan came into office in 1981, the commission didn't focus
on regulation for many years," says Amy Goodman, who held several SEC
posts between 1976 and 1987 and now co-chairs the corporate governance
practice group at law firm Gibson, Dunn & Crutcher LLP.
The regulatory environment may have
stalled, but the early 1980s proved to be a turning point in the
development of the governance model that defined shareholders as owner and
monitor. Reagan's assault on U.S. antitrust laws persuaded Millstein, then
an antitrust lawyer, to try to expand his practice into corporate law. "I
realized that without antitrust laws the only moderating force on
corporate power was the ability of [shareholders] to get involved if
things went wrong," he says. "I began to think about what in the corporate
system might be better than smash-and-bang takeovers and lots of
hollering, screaming and litigation. It seemed to me the best way to
circumscribe excess power and deal with entrenched power was through the
vehicle of better governance."
This was also a pivotal moment for
Lipton. American companies were facing unprecedented levels of foreign
competition. American corporations had been shaken up in the turmoil of
the '70s, hit by high oil prices, recession and high interest rates.
Rivals, particularly from Japan, grabbed market share from U.S. auto and
electronics companies. In many cases, U.S. targets were unprepared, and
the aggressors gained ground quickly. Meanwhile, corporate raiders such as
Carl Icahn and T. Boone Pickens -- who today fancy themselves kinder,
gentler activist investors waging the populist fight for Joe the
Shareholder -- saw an opportunity to shake up entrenched management by
taking offers directly to shareholders. They were empowered by the
explosion in junk bonds from upstart Drexel Burnham Lambert Inc.'s Michael
Milken and by the junk-fueled rise of private equity.
Management and boards had little
ammunition against the first onslaught. Share prices were relatively low,
shareholders unhappy, and directors and managers had rarely experienced
the sense that they were not in control. "There were no cases that said a
board of directors had the power to reject a hostile takeover bid," says
Lipton. "By 1979, I had been struggling with that for about 10 years,
giving opinions that it was within [a board's] business judgement. But it
kept coming up. I decided it would be appropriate to lay out my thinking
and I did in my 1979 article ["Takeover Bids in the Target's Boardroom"].
That provoked a storm and [my paper] was attacked in a series of
Although Lipton invented the poison pill
in 1982, providing companies a defense against takeover (and Wachtell
Lipton a booming business in M&A defense), the broader climate was
swinging toward Millstein and his shareholders-as-owners model. The
Delaware courts began applying the business judgment rule to hostile
takeover cases in the '80s, validating Lipton's position that boards could
use the rule to reject bids, but also limiting the ability of corporate
boards to just say no.
In 1985, Institutional Shareholder
Services Inc., founded by governance pioneers Monks and Minow, emerged to
help institutional investors meet their fiduciary duties under the
Employee Retirement Income Security Act, or Erisa, which requires pension
asset managers to vote every share of stock on every issue on a company's
proxy. In its earliest form, ISS provided guidance on mostly routine
governance matters to money managers with trillions of dollars' worth of
pension assets and mutual funds under management. Acquired by
RiskMetrics Group Inc. in 2006, the firm today, along with competitor
Glass, Lewis & Co. LLC, wields enormous clout through its voting
recommendations on issues such as board elections, CEO pay, and mergers
With power comes scrutiny; the so-called
proxy governance firms have, ironically, been criticized for their lack of
accountability and increasing power. "The proxy advisory services are the
two-ton gorilla in governance," says Gibson Dunn's Goodman. "When
RiskMetrics sets forth how it is going to vote and bases that on the
governance practices companies have in place, companies ignore them at
their peril. But who are they to be setting these standards?"
That criticism doesn't reflect reality,
counters Patrick McGurn, special counsel to RiskMetrics' ISS
Governance Services unit. "People like to pretend that we lead our
institutional clients around with a leash. That's simply not the case. Our
clients drive our processes. We start our process by seeking input from
our institutional clients about their views. Nearly all of our guidelines
are written based on a case-by-case analysis. We do include information
about company performance, board structure and governance performance."
Greater oversight could quiet critics of
RiskMetrics and Glass Lewis, and the SEC is seeking comment on whether
regulation is warranted. The SEC has taken a more activist approach to
governance than any commission since the Enron Corp. and WorldCom Inc.
accounting scandals of the early 2000s. Those scandals not only spawned
Sarbanes-Oxley, but helped fuel the rise of activist hedge funds, which
saw corporate governance fixes as a means to two ends: winning the support
of institutional investors in shareholder votes and ultimately lifting
share prices of undervalued companies. Robust M&A in the early 2000s and
the increased flow of capital to hedge funds from investors salivating
over the prospect of absolute returns -- including institutional investors
new to this alternative asset class -- further fanned the activists'
The financial crisis has, of course,
propelled the role of boards and balance sheet transparency high onto the
regulatory and legislative agendas while damaging both shareholder and
stakeholder advocates. Still, some believe the crisis has presented an
opportunity for hedge funds and unions to press long-held agendas on
issues such as say-on-pay to a sympathetic Obama administration. "A crisis
brings about an excuse for reform or legislation," says Gregory Taxin, a
co-founder of Spotlight Advisors LLC and a founder of Glass Lewis.
"I don't think the financial crisis can be blamed on pay packages. ...
[It]'s a convenient solution."
Say-on-pay is included in the
House-approved financial reform bill, and the Obama SEC has adopted
disclosure rules about director qualifications and the relationship
between compensation and risk. The agency has also eliminated broker
discretionary voting in director elections. Some have predicted that some
form of proxy access, which would give shareholders that have held a
threshold level of stock for a certain period of time the ability to
submit director nominees on the company proxy card, will be finalized in
Perhaps. What's more certain is that the
argument over shareholders and companies will continue, percolating
through the complex network of institutions. After all, it's a truism of
all governance questions that any measure of success or failure is
completely subjective. There's no way to test whether the shareholder
model or the stakeholder model provides the complete range of desirable
outcomes for a bewilderingly diverse collection of interests.
What is clearer is that corporate
governance as an institutional-building exercise has been a rousing
success. The evidence: the astounding growth and proliferation of the
corporate governance complex, which like any burgeoning bureaucracy takes
on a life of its own. As Latham & Watkins' Nathan says, "You can never say
we won. Life is good. If you do, you're out of a job."
Berle and Means might not be thrilled by
the results their seminal insights have had and they would certainly sense
that they were cited more often than read. But they would certainly be
impressed by how big and complicated the industry they all but started has
Table of contents
By Suzanne Stevens
Millstein and Lipton are at opposite ends of
the spectrum, but a middle ground has also emerged
By Suzanne Stevens
Bebchuk leads a group of
academic-practitioners. But the story doesn't end there.
By Michael Rudnick
hedge funds aim for direct intervention,
some are kindler and gentler than others.
By Michael Rudnick
Recognizing their limitations, pension plans
and unions push for majority voting rather than proxy access.
By Suzanne Stevens
Congress is reaching into boardrooms most
forcefully on executive compensation.
Gotshal's corporate governance team, led by Ira Millstein,
advocates shareholder democracy.
Lipton, Rosen & Katz's attorneys have planted their flag
with management and boards.
Dunn's Amy Goodman occupies the middle ground.
Weil, Gotshal & Manges LLP
has built a powerhouse corporate governance practice on the reputation of
Ira Millstein, who in 1994 helped General Motors Corp. draft one of
the first sets of public company guidelines outlining governance best
practices. Soon after, pension giant California Public Employees'
Retirement System, another Millstein client, mailed the guidelines to
its 350 members. "That was when the gospel really began to spread," says
Millstein continues to practice at Weil but preaches his gospel of
shareholder democracy at his namesake Millstein Center for Corporate
Governance and Performance at the Yale School of Management. Continuing
the Millstein tradition at Weil is governance attorney Holly Gregory,
whose clients include TIAA-Cref, Tyco Electronics, Yahoo!
Inc. and UnitedHealth Group Inc. She lectures extensively on
governance topics and has helped organize governance programs for the
Securities and Exchange Commission and the World Bank. Rounding out Weil's
governance team are former Delaware Supreme Court Chief Justice E. Norman
Veasey and Ellen Odoner.
Martin Lipton and his elite force of like-minded attorneys at
Wachtell, Lipton, Rosen & Katz have planted their flag firmly in the
camp of management and boards, and profited from it enormously. Lipton's
invention of the poison pill in 1982 to help companies beat back hostile
bidders is universally recognized as a landmark moment in corporate law.
Since then, Wachtell has become a go-to firm for corporations fighting
hostile takeovers, shareholder activist campaigns and other
governance-spawned challenges. Indeed, Wachtell's success as a firm soared
as the prevailing shareholder model grew ever-more ubiquitous.
Lipton's client notes have long been famous, and his partners are
steeped in his school of thought. Theodore Mirvis writes extensively on
corporate governance and lectures at the Harvard graduate schools of
business and law. William Savitt, who co-wrote a 2007 article with Lipton
titled "The Many Myths of Lucian Bebchuk" -- a swipe at the Harvard Law
professor's views on shareholder democracy -- advises Wachtell clients on
proxy contests, shareholder class actions and regulatory enforcement
actions relating to mergers and acquisitions.
Gibson, Dunn & Crutcher LLP is another firm with deep roots in
governance. John Olson, founding partner of the firm's Washington office,
is among governance practitioners as intellectually influential as
Millstein and Lipton. He has led or sat on governance committees of the
American Bar Association, the Federal Bar Association, the New York Stock
Exchange and the American College of Investment Counsel. Today he
co-chairs Gibson Dunn's corporate governance practice with Amy Goodman,
another prominent governance attorney.
If Millstein and Lipton are on opposite ends of the shareholder rights'
spectrum, Goodman falls somewhere in between. As an SEC official from 1976
to 1987, Goodman helped implement some of the earliest governance rules
regarding corporate committee disclosure. These days, she's inched closer
to the Lipton camp and is more concerned with over-regulation and the
speed at which Congress and the SEC are moving to adopt new rules in the
wake of the financial crisis.
"I don't think we've thought through some of the governance issues.
Proxy access, for example, is very controversial," says Goodman. "Everyone
seems to agree that one of the causes of the financial crisis was undue
focus on the short term. Proxy access would exacerbate that, because if
directors are going to face more election contests on an annual basis,
their motivation is to keep the stock price up, which forces a short-term
Latham & Watkins LLP may not have a governance icon in-house,
but the firm has a strong governance practice and it's got Charles Nathan,
co-chair of the American Bar Association task force on shareholder
proposals and a skeptic of shareholder rights, whose comments must set the
blood of democracy advocates boiling. "Frankly, the more I looked at
corporate governance, the less I thought was there," says Nathan. "You can
analogize it to [Catholicism]. You can't prove there's a God, but, by
golly, good Catholics believe it. Corporate governance has many of the
same attributes. You can't demonstrate it has anything to do with how
corporations function as economic models. But, by golly, people believe
Harvard Law School Program on Corporate Governance is the
base of Lucian Bebchuk.
- Stanford's Joseph
Grundfest is a frequent sparring partner.
- Bebchuk's Harvard
colleague Mark Roe is a less-activist, research-focused academic
contributing to corporate governance.
The Harvard Law School Program on
Corporate Governance brings together leading thinkers on all sides of the
shareholder rights divide. Its 2009 roundtable on proxy access attracted
Delaware Court of Chancery Vice Chancellor Leo E. Strine Jr.; senior
Securities and Exchange Commission adviser Kayla Gillan; Dean Shahinian,
senior counsel for the Senate Committee on Banking, Housing and Urban
Affairs; and AFL-CIO associate general counsel Damon Silvers, among
The program is best known, however, as
the base of Harvard Law professor Lucian Bebchuk, a prolific researcher,
writer and occasional investor activist. Bebchuk sports a near-perfect
record on a flurry of bylaws he proposed in 2007 and 2008 at companies
including Home Depot Inc., FedEx Corp., Safeway Inc.
and CVS Caremark Corp. "It's very useful for academics to be more
exposed to issues of practitioners and for practitioners to be exposed to
empirical research that can resolve some issues they wrestle with," he
Bebchuk's activism, particularly on pay,
has been buoyed by the Harvard Law School corporate governance blog he
co-founded in 2006 with Strine, who has written and spoken extensively on
his own nuanced, and hardly Bebchukian, views on governance. The site has
become the leading online hub for lawyers, academics, practitioners,
regulators and others, many of whom regularly contribute. Wachtell,
Lipton, Rosen & Katz's Martin Lipton and his partners often post on
Ensconced 3,000 miles away at Stanford
University is Bebchuk's frequent sparring partner Joseph Grundfest, who
co-directs the school's Directors' College and founded the Stanford
Securities Class Action Clearinghouse, which provides online information
about securities fraud litigation. Grundfest -- a frequent contributor to
Harvard's blog -- often opposes Bebchuk on issues such as proxy access.
The former SEC commissioner (1985 to 1990) says it's likely activist
investors will run candidates as a way to get attention for their agendas,
which is why he isn't surprised that access is an SEC priority. "Lots of
people say Democrats are politicizing the process. Well, in Washington,
everybody politicizes everything," he says. "When Republicans control the
White House, the corporate side of the story tends to be dominant. When
Democrats control the White House, the side of the story that's more
aligned with unions and state pension funds tends to predominate."
Back on the East Coast, the Millstein
Center for Corporate Governance and Performance at the Yale School of
Management brings together governance academics, executives and investment
managers to conduct research and disseminate work to policymakers and
practitioners. "I wouldn't say we're out there beating the drum for
anything in particular. We want to keep the subject of corporate
governance alive," says the center's namesake, Weil, Gotshal & Manges
LLP's Ira Millstein. "What we're trying to do is focus on what are the
problems and how do we go about solving them," he says.
The financial crisis introduced new
problems, admits Millstein, and spotlighted the challenges boards face in
overseeing management and mitigating risk. "It has to do with being too
complex. I believe some boards of these financial services companies
wanted to know what the risks were and tried very hard to find them. But
either they didn't come up to their level, or they were using outmoded
formuli, and they didn't have their hands around the whole thing."
As director for the University of
Delaware's John L. Weinberg Center for Corporate Governance (named for
Goldman, Sachs & Co.'s Weinberg), Charles Elson has a front-row seat on
Delaware jurisprudence. Elson recruited Delaware Supreme Court chief
justice Myron Steele and Chancery's William Chandler for the center's
advisory board; they join AFSCME corp gov director Richard Ferlauto and
National Association of Corporate Directors CEO Ken Daly. A lawyer long
active on board issues (of counsel at Holland & Knight), Elson gained
prominence in the 1998, when as a Sunbeam Corp. director he helped sack
CEO "Chainsaw" Al Dunlap.
The contributions of a less-visible,
less-activist group of researcher academics are no less meaningful. A
prime example: Bebchuk's Harvard colleague and former Columbia Law School
professor Mark Roe, who teaches bankruptcy and corporate law. Roe has
written extensively on Delaware law, finance and politics over two
decades. His objective is not to prove or disprove some piece of doctrine
but to study outcomes of rules and regulations. "Much more often than we
usually think, the legal outcomes come from the political muscle behind
interest groups and public opinion," he says. "Whether it's good
governance or bad governance often isn't determinative."
interests of institutional investors and activist hedge
funds are sometimes misaligned.
- Hedge fund activists
come in every shape and color.
- Some take a longer term
governance and operational focus.
Institutional investors often view activist hedge funds as short-term
agitators. "Because they can take concentrated stakes and their time
horizons are three to five years, they tend to be more interested in
pushing for board seats and transactions as opposed to longer-term
corporate governance objectives," says Brandon Rees the deputy director of
the office of investment at the AFL-CIO.
On the other side, activists argue that
they take the kind of direct action pensions and unions eschew. The real
source of friction: Activists may seek outcomes, like the sale of all or
part of the company, that can create disruption or job losses. In short,
there's always the possibility of a misalignment of interests between the
two groups. And hedge fund activists come in every shape and color, from
the often spectacular aggressiveness of Carl Icahn to the kinder, gentler
approach of, say, a Ralph Whitworth.
Whitworth's Relational Investors LLC
is found on the list of fund managers in California Public Employees'
Retirement System's nearly $7 billion corporate governance activist
fund. His $6 billion activist fund was launched in 1996 with a $200
million CalPERS investment.
While many of his peers are what
Whitworth calls "event driven -- they serve as a catalyst to cause a
certain event such as a spinoff or takeover," Whitworth says most of his
campaigns are "lower profile," involving a longer-term governance and
operational focus with "little shakeup." But it was a confrontational
campaign that led to the ouster of Home Depot Inc.'s CEO, Robert
Nardelli, in early 2007 that helped to cast Whitworth into the spotlight.
Nardelli more than doubled Home Depot's
bottom and top lines over five years. But Whitworth argued that the growth
was coming from "lower return opportunities," including a noncore supply
business. "Nardelli grew the hell out of earnings and revenues, but did it
without regard to cost," he says. Nardelli ultimately stepped down after
coming under fire for the size of his pay package.
As president of T. Boone Pickens' seminal
United Shareholders Association from 1986 to 1994, Whitworth was an early
proponent of proxy access and lobbied the Securities and Exchange
Commission for reform. Rules for proxy access have yet to be finalized,
but Whitworth has had at least one notable success along the way. While
chairman of Apria Healthcare Inc. in 2000, he worked to amend its
bylaws to include proxy access, and he claims that it's the only public
company to have that bylaw provision.
Advocates of proxy access preach it will
lower barriers to entry for dissident director candidates by eliminating
some proxy contest costs. But not everyone agrees. Gregory Taxin,
co-founder of Glass, Lewis & Co. LLC and now a managing member at
Spotlight Advisors LLC, insists that most of the money spent is
"beyond just ink and mailing, which proxy access would eliminate." Steep
costs associated with hiring proxy solicitors and legal fees are not
addressed by proxy access.
One provision contained within proposed
proxy access rules that Taxin backs is the "universal proxy card," which
allows shareholders to choose individual candidates from both incumbent
and dissident slates rather than having to elect one slate or the other.
But until a universal proxy card rule is established, the best dissidents
can offer shareholders in terms of a pick-and-choose option is running a
"short slate" of candidates.
Richard Breeden of Breeden Capital
Management LLC can be thanked for this measure. It was during his run
as chairman of the SEC from 1989 to 1993 that the commission established
the "short slate" regulation, allowing shareholders to contest individual
board seats rather than running a full slate. Breeden took advantage of
this rule in his successful campaign at Zale Corp. in 2008.
Taxin's Spotlight partnered with hedge
fund Clinton Group Inc. in late 2009 to take aim at Red Robin
Gourmet Burgers Inc., which despite lackluster returns, paid its top
officers more than the median for 33 similarly sized companies, according
to Hedge Fund Solutions LLC. Taxin argues that the board's
plurality voting system "did not create the imperative to do something"
With the threat of a proxy contest
looming, Red Robin agreed to recommend that shareholders vote at the 2010
annual meeting to adopt majority voting, form a CEO search committee and
appoint four new directors. The stock now trades at near $26, up about 45%
from the start of the year.
Over at James Mitarotonda's decade-old
hedge fund Barington Capital Group LP, chief operating officer
Jared Landaw says the fund takes a "pragmatic view of governance" rather
than a "check the box" approach in which popular governance issues like
majority voting or say-on-pay are pushed on companies as a
one-size-fits-all solution. Barington's successes include plastics company
A. Schulman Inc., whose board ofdirectors, which was firmly
entrenched thanks to a plurality voting system and staggered elections,
sat idle as its North American division lost money.
In 2005, the company named Mitarotonda
and David Birney, former president and CEO of plastics company Solvay
America Inc., to the board. The once unprofitable North American unit
recently recorded a $200,000 quarterly profit, the board has since been
declassified, and the company has adopted majority voting.
That's how it's supposed to work.
manages its assets in-house, thereby keeping closer tabs on
- TIAA-Cref has lobbied
its holdings to adopt say-on-pay.
- Both pension funds and
unions are pushing hard for majority voting.
The heavily indexed, long-term nature of
institutional investors prohibits them from doing "the Wall Street walk"
-- that is, selling -- when stocks underperform. One of their few options:
agitate for governance measures and hope things improve.
Institutions like pension funds and
unions thus rely heavily on moral suasion and public relations. It's
impossible to judge results, though it is clear institutional clout is far
less than the size of its total assets would suggest. And institutions are
at the center of the charge that most shareholders don't monitor boards or
Some pension funds have bigger megaphones
than others. The biggest is the California Public Employees' Retirement
System, or CalPERS, America's largest public pension fund, with $210
billion. The "vast bulk" of CalPERS' assets are managed in-house, which
means it can keep closer tabs on governance than many of its peers, says
Anne Simpson, its senior portfolio manager for corporate governance.
Simpson took charge of CalPERS' governance program in 2009 after serving
as first executive director of the International Corporate Governance
Network, an organization across 45 countries that seeks to raise
governance standards globally.
CalPERS has a staff of 61 to "sift out
serially underperforming companies in its portfolio" and analyze whether
governance improvements could prompt turnarounds, she says. The sheer
number of investments prohibits it from vetting them for governance before
buying. Instead, she says, "our strategy is to be an active owner within
this passive strategy."
CalPERS employs a model in which "we also
pick out a particular issue where we think the market needs cleaning up
... a marketwide issue regardless of performance." The issue du jour:
majority voting for boards that operate under a plurality system. CalPERS
recently examined its top 300 U.S. equity holdings and found 58 lacked
majority voting. It wrote to these 58 and may follow up with shareholder
Majority voting has also been a goal of
the vocal New York City pension funds and retirement systems. New York
City Comptroller John Liu oversees development of its shareholder proposal
programs, proxy voting policies and guidelines. Last year, New York
submitted proposals to 32 companies, ranging from resolutions to repeal
staggered boards to adopting pay-for-performance standards. The five New
York City funds, with some $105 billion under management, submitted six
say-on-pay proposals last year: One was adopted by retailer Charming
Shoppes Inc. before going to a vote; two others received majority
The California State Teachers'
Retirement System, or CalSTRS, the No. 2 public pension fund, with
$138 billion, has written to companies with directors who also held board
seats at failed financial institutions, requesting an evaluation before
they sought re-election, says CalSTRS director of corporate governance
Anne Sheehan. The argument that the implosion on Wall Street was tied to
short-term incentives -- bonuses -- has sparked say-on-pay proposals.
CalSTRS recently developed compensation guidelines calling for longer-term
performance structures involving restricted awards and submitted them to
300 of its largest holdings, "which led to a dialogue with 60 companies,"
This year, the fund also submitted 21
resolutions, from improving board diversity to requesting that poison
pills be put to shareholder votes. CalSTRS also has a $3 billion
governance fund invested in activist managers.
Private pension manager TIAA-Cref,
which services mostly university employees, is acting now to facilitate a
"private market-based solution" for say-on-pay rather than waiting for
legislation, says senior vice president and head of corporate governance
Hye-Won Choi. The country's largest private pension fund, with some $425
billion, has lobbied its holdings to adopt say-on-pay and "be the first
movers on this reform instead of waiting for legislation," she says.
TIAA tends to initiate discussions
privately with boards and management before taking the proxy route. "We
find companies are much more forthcoming and conversations are broader and
more meaningful if the companies know the content will remain
confidential," Choi says.
Successes? Choi cites PepsiCo Inc.'s
recent decision to voluntarily add a say-on-pay resolution following a
TIAA proposal that garnered a "high level of support" but fell short of a
Unions generally employ a more public
approach. The proof: Public pension funds filed 26 shareholder proposals
in the first six months of 2009, while unions filed 122, according to
proxy solicitor Georgeson Inc.
Lisa Lindsley, director of capital
strategies at the American Federation of State, County and Municipal
Employees, or AFSCME, says pension funds' significant stakes allow them "a
greater level of access" than unions. Companies may not welcome union
governance suggestions in the belief that they hide a collective
bargaining agenda, says John Wilcox, chairman of international governance
consultancy Sodali Ltd. and TIAA's former governance chief.
Lindsley took control of AFSCME's
governance program in March, coming from a similar role at the United Food
and Commercial Workers International Union.
Brandon Rees, deputy director of the
office of investments of the AFL-CIO, a broad federation of unions whose
members participate in union-sponsored pensions worth $4 trillion, faults
the failure of risk management committees at the banks for the crisis.
After shareholder efforts led by the AFL-CIO and AFSCME, the former
chairman of Citigroup Inc.'s audit and risk management committee,
C. Michael Armstrong, and most recent committee chair John Deutch stepped
down before the 2010 election.
Daniel Pedrotty leads the AFL-CIO effort
as the chief investment officer, advising union-sponsored pension plans.
The union federation filed 17 shareholder proposals in the first half of
2009, from declassifying entrenched boards to say-on-pay, and this year
withheld votes from directors on the health and safety committee of coal
miner Massey Energy Co.
Ed Durkin, director of corporate affairs
at the United Brotherhood of Carpenters and Joiners of America, or UBCJA,
is a relative old-timer in governance. For nearly three decades, he has
overseen corporate governance monitoring for North America's largest
building trade union. Last year, UBCJA put forth 71 majority voting
proposals, more than half of which were settled before being put to a
shareholder vote. The union, whose plans hold $40 billion, has recently
focused on majority voting, submitting 57 proposals on the matter in 2010,
most of which were settled, he says.
Durkin recognizes the limitations of
institutional investors. "Public pension funds, for all of their talk,
don't do that many proposals," he says. Proxy access is "a tool that
doesn't fit the big institutional investors, whereas majority voting
strictures of corporate governance have traditionally been a
combination of company bylaws, Delaware case law, federal
law and SEC disclosures.
- Congress is reaching
into boardrooms most forcefully on executive compensation.
- Although plenty of
politicians are masters at pumping up populist rage, Barney Frank is in a
position to do something about it.
The strictures of corporate governance
have traditionally been a combination of company bylaws, Delaware case
law, federal law and Securities and Exchange Commission disclosures. Given
the depth of the financial crisis, it's no surprise that the latter two
are rethinking the federal rules that govern board oversight and risk
management. Congress is reaching into boardrooms most forcefully on
executive compensation. Although plenty of politicians are masters at
pumping up populist rage, Massachusetts Rep. Barney Frank is in a position
to do something about it.
The fast-talking, occasionally
exasperated Massachusetts Democrat heads the powerful House Financial
Services Committee and in December drove through the Wall Street Reform
and Consumer Protection Act, which includes a "say on pay" provision to
give shareholders an advisory vote on compensation. It's Wall Street
bonuses, though, that get the Congressman most riled up.
"The notion that the most highly paid
people in prestigious institutions, unlike the rest of us, have to not
only be compensated but given something extra to do their jobs is
offensive," says Frank. "We asked ... Lloyd Blankfein, Ken Lewis at the
time, Vikram Pandit, Jamie Dimon, 'What is it that you now do on the job
that you would stop doing if you didn't get a bonus?' They all said,
Frank isn't going after the bonus system
per se, but the House bill does enable regulators to ban compensation
packages at financial institutions that they believe encourage undue risk.
SEC Chairwoman Mary Schapiro isn't as
voluble as Frank, but she has been just as busy. In just over a year, the
agency has adopted new disclosure rules about board leadership, director
qualifications and risk oversight. Some form of proxy access, which would
allow shareholders who meet minimum standards to include director nominees
on the company's proxy, at the company's expense, is likely to be approved
Driving change alongside Schapiro is
senior adviser Kayla Gillan, who spent 16 years as general counsel for the
California Public Employees' Retirement System, was a founding
member of the Public Company Accounting Oversight Board in Washington and
spent a year as chief administrative officer at powerhouse proxy advisory
RiskMetrics Group Inc. Those activist roots align perfectly with
the Obama administration's preference for shareholder access.
In Delaware, Court of Chancery Vice
Chancellor Leo E. Strine Jr. has become a force in corporate governance.
Strine, who has over the years argued that Delaware should grant proxy
access to preserve its corporate law franchise, is a regular at industry
conferences and co-founder of the Harvard Law School corporate governance
blog with Lucian Bebchuk.
Strine's own views on access are more
complex. On one hand, Strine the judge operates within Delaware law, which
tries to define the limits of board and shareholder powers, particularly
when it comes to M&A. But Strine the commentator has been skeptical about
aspects of the governance orthodoxy, from differences in self-interest
among shareholders to the intense focus of activists on hot-button issues
like poison pills or staggered boards. Strine has often pointed out the
tendency of the governance establishment to emphasize problems that it can
then solve. And, he writes, Americans have been forced to plan for
retirement as long-term investors, almost always through institutions.
Many of these institutions operate on shorter-term time horizons and are
often opaque, creating a systemic issue for shareholder democracy.