Years ago, if you mentioned "corporate governance," most investors' eyes would glaze over. It's not difficult to imagine many proxy statements tossed unread into many trash cans, even though these documents represented important disclosures and, even more significant, shareholders' votes and ownership stakes in businesses.
Somehow, the prevailing notion became that profit and share price were the only things that mattered in investing, and board composition, voting rights, and CEO pay issues were often completely ignored.
These days, the link between corporate governance, shareholder rights, and choosing solid investments is gaining the attention it deserves.
Shareholder revolts sow the seeds
It's been quite a year, given terms like "shareholder spring" and high-profile examples of shareholders finding their collective voice. Vote tallies at some companies have illustrated that shareholders are now paying far closer attention to corporate governance issues, and voting accordingly.
In one of the highest-profile shareholder insurrections against "business as usual" at a major American corporation this year,Citigroup (C 5.16%) shareholders voted against CEO Vikram Pandit's pay.
Some corporate managements showed they couldn't even tolerate any constructive shareholder criticism. When British shareholders voted against Aviva's (AV +0.54%) CEO compensation policies, CEO Andrew Moss responded by quitting. AstraZeneca's (AZN +0.00%) David Brennan was another CEO casualty of shareholder pressure regarding pay and performance.
The heat of the annual meeting and proxy voting season is over, but let's not mistake the lull in activity for a return to the days of shareholder apathy.
Shareholder rights are blooming
A Wall Street Journal article this week underlined the progress shareholders have been making, describing how corporate governance policy is becoming an essential part of the conversation about investing.
For example, slowly but surely, board independence is increasing. The Journal reported some fascinating data from proxy advisory firm Institutional Shareholder Services. Today, 21.5% of S&P 500 companies have an outside director serving as chairman of the board, a huge increase from just 3% 10 years ago.
Other heartening signs include corporations increasingly embracing shareholder-friendly gestures like eliminating staggered board elections and putting majority voting in place. Both of these have a huge influence on the level of difficulty shareholders have in voting out underperforming or even incompetent directors.
Only one-quarter of companies still have staggered board elections, which was a shareholder nightmare because only a portion of the board would be up for election in any given year.
Further, 80% of companies now have majority voting, which means directors must gain a majority of shareholder votes to be elected. Plurality voting, another shareholder nightmare, basically meant a director only needed one lousy vote to stay on the board.
Greener pastures for growth
Obviously there's still plenty of work to do in ensuring shareholder-friendly policies. Earlier this week I tackled a negative policy that's on the upswing: multiple-class stock structures, which are in place at newly minted public companies like Facebook (NASDAQ: FB) and Zynga (NASDAQ: ZNGA).
Multiple-class stock structures allow companies to go public without requiring management to relinquish any power, because managements' shares trump outside shareholders' votes.
In their brief histories of publicly trading, neither Facebook nor Zynga has given much reason for investors to trust management. Facebook has faced one scandal after another after its public debut, and today some are speculating that Zynga CEO Mark Pincus might consider taking the company private, and it's only been public just shy of a year.
It's no surprise there's still work left to do in reminding corporate managements and boards that they are beholden to shareholders, not their own self-interest and control. And more shareholders need to come to the realization that they're part-owners of public companies, so they should act like it.
However, 2012 has accelerated progress and strengthened shareholders more than ever. If we investors continue to take long-term views and weigh factors like corporate governance policies in our investment decisions and proxy voting, we'll see far more victories toward the goal of having stronger companies to invest in -- and a stronger marketplace.
Check back at Fool.com for more of Alyce Lomax's columns on environmental, social, and governance issues.
