A Rogue Manifesto: Organizing for Change
Part 5 of 5
By Jim Surowiecki
In 1960, AT&T announced that it would be serving lunch at its annual meeting. Eleven thousand people showed up to hear about the future of the company they owned. Four years later, AT&T decided to eliminate lunch from the menu, perhaps in a well-intentioned attempt to use the shareholders' money responsibly. Not surprisingly, attendance dropped precipitously. Fewer than three thousand shareholders showed up.
A telling story, to be sure, but not a particularly shocking one. As Rogue has pointed out in previous installments of this series, individual American shareholders are almost universally uninterested in exercising the prerogatives of ownership and unconcerned about the business strategy or tactics of the corporations they own except insofar as they affect the company's daily stock price. Even if they are concerned about all these things, they are marginalized by both the realities of small holdings and by a regulatory system designed to keep power in the hands of management. In that last sense, the problem is a chicken-and-egg one. Impotence keeps individual shareholders uninterested, and their lack of interest ensures that they will gain neither the public attention nor the collective strength that would help remedy their lack of power.
There are, of course, noteworthy exceptions to the general rule of shareholder indifference. Lewis Gilbert, who became known as "America's professional shareholder," was a prototypical corporate gadfly during the 1950s. He and his brother bought shares in many different companies and spent their time offering proxy resolutions and traveling to annual meetings to ask corporate managers difficult questions. Initially, Gilbert was dismissed as precisely the kind of crackpot the SEC's tough rules on proxy resolutions were designed to impede. But by the early 1960s more than a few company presidents had decided that dealing with Gilbert was more sensible than merely ignoring him, so that while Gilbert saw very few of his resolutions voted in as policy, he saw more than a few of his recommendations implemented.
In retrospect, Gilbert's work seems singularly non-crackpot. His goals were, for the most part, practical and reasonable reforms of a corporate governance system that was stacked in favor of management. He agitated for independent boards. He helped convince companies to move their annual meetings from places like Hoboken, New Jersey and Wilmington, Delaware to locations that were easier for large numbers of people to reach. He pushed corporations to ensure that directors were also shareholders. And he sought to ensure that companies paid attention to the SEC's rules on proxy solicitation. All of these were genuine innovations, and some, in fact, remain crucial elements of any shareholder reform program.
Ironically, though, Gilbert was not responsible for perhaps the most noteworthy single moment of independent shareholder activism, which came in 1960 when small shareholder Sol Dann, a Detroit lawyer, stood up at Chrysler's annual meeting and launched into a one-hour-and-twenty-minute assault on the company's management. Chrysler had just suffered two straight years of losses, and in six years had run up $250 million in long-term debt. Dann blamed managers for incompetence, but he also pointed to the possibility of corruption, suggesting that the company had set up sweetheart relationships with its suppliers and was overpaying for steel and other parts. Dann's charges might have been dismissed, as they were by many at the meeting, as the self-absorbed rant of a man who was keeping everyone from getting to lunch. In fact, though, it was soon revealed that Chrysler's new president did have a financial stake in two of Chrysler's key suppliers, and that another top executive was a large shareholder in one of the supplier companies. Chrysler's president resigned within two months, and its chairman left office within the year. Dann was, at least in some quarters, vindicated.
The point is not that in an ideal situation Rogue envisages shareholder representatives journeying around the country to lambast management publicly for sins evil and imagined. In part, after all, Gilbert and Dann were so effective -- and so necessary -- because corporate disclosure rules remained sketchy, and because most corporations acted as if shareholders were children, to be seen (if that) and most definitely not heard. Many of the reforms for which Gilbert demanded are now, if not law, then common practice among most large corporations, and a decade of shareholder activism by institutions like CalPERS has at least put governance issues on the radar of most corporate managements.
Nonetheless, the idea that public discussion of corporate problems is often the only way to effect any measure of change is a powerful one. Along these lines, we believe that it is possible to use the Internet to fashion a shareholder organization that would work to put pressure on companies to reform their governance practices, to bring their compensation schemes in line with the principle that the interests of owners and managers should be closely aligned, to build independent boards, and, eventually, to institute a public debate about the social implications of given corporate policies.
This organization, which would be centered on a web site where message boards would allow for the free discussion of different corporate issues, would obviously be unable to affect corporate policy on the basis of the actual number of shares it could claim to represent. Even if it had thousands of members, in most cases the number of shares those people owned would be smaller than the number held by any single pension fund. Instead, it would seek to affect corporate policy through the press. Even small votes cast against management have strong ripple effects, particularly when accompanied by convincing arguments.
Ideally, then, the new organization would become a resource for individual-shareholder activism, a site to which journalists would have recourse when they were looking for commentary on corporate governance issues. It would disseminate information about upcoming proxy battles, and presumably eventually instigate those battles itself. It would send representatives to annual meetings. Imagine the effect of someone standing up and saying, "I represent the proxies of 10,000 Nike shareholders, and we would like the company to respond to our concerns about the fact that it has so few outside directors on its board and about the future of its business in Southeast Asia."
In the very best scenario, then, this organization would become a tool individual shareholders could use to leverage their small shareholdings into a genuine voice, just as individual voters are more powerful as members of political action groups than they are by themselves.
There are, to be sure, considerable obstacles in the path of any such group. Aside from the obvious ones -- shareholder indifference, the problem of publicizing the effort, the difficulties involved in managing a large group of people with divergent interests -- SEC regulations in this are are still somewhat unclear. Until the 1980s, incredibly, it was actually against the rules to solicit the support of more than 10 people for any proxy resolution. In other words, if you wanted to convince a group of people to vote against management, you simply couldn't. That regulation has been relaxed substantially, but the law in this area needs to be clarified.
Nonetheless, there have been shareholder organizations before, most notably the one set up by T. Boone Pickens in the 1980s. And today there are a number of bodies that represent shareholder interests with regard to issues like trading, access to IPOs, etc. The model, then, of shareholders acting collectively is well established. In our wildest dreams, what we imagine is combining that model with the sort of investigatory and public advocacy writing featured in these very columns to create an organization that can influence the public debate in a meaningful way. This manifesto, in a sense, can be seen as a rough draft of what that organization's statement of principles might look like.
The possibility of such an organization conjures up, for many, ideas of harassment or publicity-driven blackmail. But the only reason we associate shareholder activism with such ideas is because we remain locked into a mindset that treats shareholders as fundamentally irrelevant to the corporation. It's only because we feel we aren't justified in speaking out that we feel guilty at the prospect of speaking out. The reality instead is that as shareholders, we are the owners of America's corporations. That means we are, in however minor a sense, responsible for what corporations do. And just as citizens vote even when they are just one member of an electorate of more than 130 million, shareholders have the responsibility to vote even when they own just 100 shares. More importantly, though, they have the right to work with other shareholders to bring about change in situations where change is needed.
Shareholder democracy has made great strides in the last decade, but it still has a long way to go. Watch this space in the future for possible news. If that organization ever does get off the ground, you'll hear it here first.