“Corporations determine far more than any other institution the air we breathe, the quality of the water we drink, even where we live. Yet they are not accountable to anyone.”
Those words were on the 1991 cover of Power and Accountability: Restoring the Balances of Power Between Corporations and Society by Robert A.G. Monks and Nell Minow, long before 2010 when the United States Supreme Court ruled that the First Amendment prohibits government from placing limits on independent spending for political purposes by corporations in Citizens United v. Federal Election Commission. It was a great awakening. Many more began to realize how much power over our government we had ceded to corporations.
In 1987 Time magazine estimated that “of the 170 countries that exist today, more than 160 have written charters modeled directly or indirectly on the U.S. version.” More recently, David Law and Mila Versteeg compared constitutions world wide and found ours losing influence. ”Nobody wants to copy Windows 3.1,” says Law. Our constitution fails to protect entitlements to food, education and health care and is considered by many to be “frozen in amber.” In contrast, the Canadian Charter is seen by those in developing countries as “more expansive and less absolute.”
Many are now engaged in a movements, such as “We the People,” to “end corporate rule” and “legalize democracy.” While I support those efforts, a multi-pronged approach aimed at “legalizing” democracy both within our governments and within our corporations is needed. While many have written a great deal about political democracy, fewer have drawn attention to the need for corporations to be more democratic. Since corporations have so much control over our governments, we can’t take control of our government without a higher degree of control over how our corporations are governed. It is a symbiotic relationship.
What would you do if the company in which you’ve invested your hard earned dollars frittered it away so that an investment of $20,000 is now worth $3,000? David Monier, a shareowner at Princeton National Bancorp, Inc (PNBC), decided he wasn’t going to sit by idly. He utilized model United State Proxy Exchange language and reports his proxy access proposal will be included on PNCB’s proxy. If adopted, it would allow:
- 1. Any party of one or more shareowners that has held continuously, for two years, one percent of the Company’s securities eligible to vote for the election of directors, and/or
- 2. Any party of shareowners of whom one hundred or more satisfy SEC Rule 14a-8(b) eligibility requirements ($2,000 worth of stock held for a year),
This is significant because shareowners don’t have access to place their nominees on corporate proxies. Their proxies are treated as management proxies. If shareowners want to nominate directors they must hire a soliciting firm and mail out their own proxies. Since costs can be in the millions, only hedge funds can generally afford to do it and they are often looking to break up the company and sell off the parts. Monier will also be nominating Steve Bonucci from the floor of the annual meeting, so there is a real opportunity for change. Let’s hope CalPERS, PERA and other institutional investors at PNBC support this move initiated by a retail shareowner.
Some proposals, like Monier’s, are driven by shareowners who believe their companies retain substantial value but that value is jeopardized by poor corporate governance… often poor oversight by corporate boards. Others, especially after Citizens United, are concerned their corporations are donating to bad political causes or should just get out of politics. Many have turned to the Center for Political Accountability for assistance in filing proposals seeking disclosure of corporate spending. Still other investors are concerned with social or environmental issues like hydraulic fracturing. They are requesting greater disclosure of measures the company has taken to manage and mitigate the potential community and environmental impacts. Like political campaigns, those attempting to democratize corporations from the inside also face a Sisyphisian task.
The reality is that if you don’t like the way management handles your business, you have traditionally had two choices: hold your nose or sell out. The message is usually the same whether dispensed by Barron’s, Merrill Lynch or the manager of many “socially responsible” investment funds. Selling out is taking the “Wall Street Walk.”
Dumping stocks compounds the short term investment horizon plaguing Wall Street. The average stock is now held for 22 seconds, according to some. Although such high speed trading guarantees “liquidity” (buyers and sellers are always there), it has moved us from an ownership to a casino economy. The Wall Street Walk is often wrong for the investor, the quality of our products and environment, the treatment of employees, our balance of payments, and society-at-large. The real issue is often not last quarter’s balance sheet but the company’s strategic direction and the integrity of its management.
CalPERS’ investment strategy is hardly typical. Most institutional stock owners are adopting shorter and shorter time horizons, evaluating companies on a 1-3 year time frame, rather than the longer term outlook of CalPERS. The average holding period has declined from more than 7 years in 1960 to about 2 years, and now, according to some, 22 seconds. The result has been an increase in transaction costs. In 1987, for example, $25 billion was spent on stock trading in the U.S. That is an amount equal to one-sixth of corporate profits or 40% of dividends that year. Money managers have shifted the emphasis of capital from long-term investments to making a quick buck.
Although CalPERS has been active in corporate governance, most pension funds are not. While some progress is being made, the Department of Labor once reported that only 35% of plans which delegated voting authority could provide evidence that they performed substantive monitoring of how their investment managers carried out proxy voting. But its no wonder plans don’t monitor; the Department has never taken an enforcement action against a fund for their failure to properly monitor voting decisions.
Most pension funds exist in a culture of “blame avoidance” built around the legal concept of “prudence.” Although portfolio theorists generally agree that 99% of the risk management value of diversification can be achieved with a portfolio of only 100 stocks, pension plans continue to over diversify. While the aggregate holdings of institutional investors now stand at more than 60%, the holdings of individual institutional investors in individual companies rarely exceeds 2% and tends to be in the 0.1% to 1% range. Since the holdings of most pension funds are not nearly as large as those of CalPERS, they would derive similar benefits from active corporate governance only if they consolidated their holdings into larger blocks to make monitoring cost effective.
If more pension funds would follow CalPERS’ lead, accountability might finally make its way into the boardroom. That would be a healthy development for investors, companies, employees and the environment. For example, it is widely accepted that employees in “knowledge” industries, such as computer software, hold the key to additional wealth generating capacity in their training, skills and information networks. Margaret Blair points to evidence that this is true not only in Silicon Valley but for most industries in the United States. Blair calculates that tangibles, such as property, plant and equipment, accounted for 62% of the total value of mining and manufacturing firms in 1982 but only for 38% in 1991. The value of intellectual property has risen dramatically as workers have become more educated.
More democratic and flexible workplaces make fuller use of employee capacities and yield tangible economic benefits. Yet managers faced with a potential loss of status and power have been slow to change. A 1986 study by the National Center for Employee Ownership found firms with significant employee ownership and participation in decision making grew 8 to 11% faster than their counterparts. A year later the General Accounting Office found that such firms experienced a 52% higher annual productivity growth rate. Findings, such as these, led CalPERS to advocate employee training and shared managerial authority. Similar findings linking “social responsibility” to the bottom line have led TIAA-CREF, CalPERS, CalSTRS and others to push for more women and minorities on boards.
Corporations have a profound effect on the quality of our environment and our lives. If they were governed and operated more democratically the influence they have on other social institutions such as government, education and even the family could be expected to change in a positive direction.
Ending Corporate Demockary
What measures can be taken to bring about more genuine democratic corporate governance? Perhaps the most important are in the area of corporate elections. Filing shareowner proposals on individual issues can have some impact, but it is like trying to run state government through propositions. Corporations would be much more responsive to shareowners and to the general public if they could be held accountable by those who “elect” their directors, shareowners.
Corporate board elections are about as democratic as old-style communist regimes; they talk the talk but don’t walk the walk. A 1991 study found that over 80% of board candidates were filled by CEO recommendations. Until 1992, when the SEC revised its proxy rules under pressure from CalPERS, CII, and others, shareholders could not even communicate with each other without going through elaborate and expensive filing procedures. Serious obstacles remain. Most companies still use “plurality” voting standards for directors. That is, if the election is uncontested (as most are), the director needs only the vote of one share to remain in office. (Most Fortune 500 companies use a “majority” standard that requires directors failing to get a majority of the vote to tender their resignation, which may or may not be accepted.)
Management controls the proxy machinery. Since proxies are normally voted well in advance of the annual meeting, they can find out how shareholders vote. Many money managers, who act as investment and voting agents for fiduciaries, have business relations with the management of firms holding elections. Until 2003, mutual funds were not even required by law to maintain written records of how they voted on behalf of their clients, so they were likely to change their vote, if requested by management. In addition, unvoted proxies were often counted in favor of management via broker voting. Even today, when most retail shareowners vote one item but leave other items on the proxy blank, those blank votes are voted automatically with management.
Ninety-five percent of shareowners who receive their proxy electronically hit the delete button or let them expire. To realize the potential of more democratic corporate governance we need to encourage monitoring and active participation in corporate governance by investors. Here are some steps you can take as an individual shareowner or an investor in mutual funds:
- Keep informed on the issues through news sources such as the CorporaterReformcoalition.org, CorpGov.net, Accountability-Central.com, and SocialFunds.com.
- Ask mutual and pension funds to announce their votes in advance. They are less likely to change their vote under pressure from corporate management when they do. If you like the way they vote, copy them when voting your own shares; if you don’t, lobby them to switch.
- Use the power of social media. Facebook is a great place to exchange “likes,” notes on what we did last weekend, and photos. The United States Proxy Exchange (USPX) uses similar tools to help retail investors influence corporations. USPX developed guidelines for “say on pay” voting, model shareowner proposals for proxy access and other guidance to help members make corporations more democratic. For $50 a year, you get your own blog, linked to a network of veteran volunteers who can help you file proposals and defend them against no-action requests.
- Sharegate.com, will soon be online with additional tools.
- Research mutual fund voting on Proxy Democracy. Invest in funds that vote they way you would.
- Don’t toss your proxy. Visit ProxyDemocracy.org and MoxyVote.com to see how respected institutional investors are voting. Find the “brand” that fits your philosophy and copy their voting patterns on MoxyVote.com‘s voting platform.
- Launch a corporate campaign. Find tools at theShareholderActivist.com.
- Upgrade the power of the press. Help your community (student government, city government, corporation) launch a contest to award the best coverage of elections and ongoing governance issues using VoterMedia.org.
To contact James McRitchie directly, please email firstname.lastname@example.org