Is the Minority Yelling Too Loud?

Jay Lorsch, who bridges the world of academia and business, has long been an advocate of greater shareholder democracy, but now he warns that government and labor pension funds are overstepping the bounds of proper conduct. A professor of human relations at Harvard Business School, he is most recently the author of Back to the Drawing Board: Designing Boards for a Complex World (2003), and he sits on the board of CA, the former Computer Associates. Here are his views:

Is there a single, cohesive shareholder democracy movement?

In a sense, yes. It goes way back to the late 1980s and early 1990s, when the council of Institutional Investors emerged and Jesse Unruh, the state treasurer in California, became the godfather of the movement. Then the public employee pension funds, like CalPERS [California Public Employees’ Retirement System] and CalSTERS [California State Teachers’ Retirement System], got organized. Their emergence improved corporate governance. That goes on. The question is, how many others have joined up? It’s not entirely accurate to say that there is a single movement.

Have those investors been joined by prominent academics and proxy advisory groups?

Yes, the academics have had a voice, people like Charles Elson and Lucian Bebchuk. Then you’ve had organizations like Institutional Shareholder Services [ISS] and some of the lawyers, such as Marty Lipton. There is a community of people. We don’t always agree. The other point to make here is that the shareholders who have been the most vocal really represent a minority of total equity, less than 15 percent.

If you throw in the hedge funds, it’s a combustible mix.

It depends on how you define a hedge fund. I’m not sure that Carl Icahn qualifies as being part of any movement. There’s no question that Icahn and Kirk Kerkorian put pressure on companies, but they do it for financial reasons. They may or may not align themselves with the pension funds. If the movement has to have a single motive, hedge funds are not really part of it.

So there are clearly different interests?

Yes, I exclude the private equity firms. They’re in it to turn companies around and to dispose of them. I don’t think they’re opposed to corporate governance, but they are not strong advocates.

However you define it, is this shareholder coalition winning?

Yes, in some ways. They certainly have made progress. We certainly have more independent boards than 15 years ago. Have we had boards that failed? Sure—Tyco, Enron, WorldCom. Boards can and do fall asleep, and they can be fooled. It will never be a perfect system. When you get yourself in a situation where management lies, deceives and covers up its illegal actions, it’s very hard for even the smartest shareholder to understand what’s happening.

What do you think of the push by the American Federation of State, County and Municipal Employees [AFSCME] to nominate directors and put them onto a company’s proxy ballot?

I’m all for corporate democracy. I really believe in it. What I’m worried about is that the Securities and Exchange Commission is going to give power to this minority of shareholders. We could have a tyranny of the minority. The people pushing for this are the public and union pension funds. They don’t represent a majority of shareholders. The majority is mutual funds, hedge funds, individuals and others.

 
If we assume that 10 or 12 percent of shares are in the hands of union and pension funds, and there is 45 or 48 percent in the hands of these other institutional investors, then 40 percent of the shareholders are individuals. The AFSCME proposal would empower the minority. I don’t think we want that in our general democracy. It really worries me that the SEC is buckling under these pressures.

Is majority voting for directors going to carry the day?

It looks like we’re going to do away with staggered boards. A lot of companies acquiesced to that because they had a poison pill. But the poison pill is now under attack. I’m on the board at CA, and Bebchuk came up with a proposal to do away with our pill. We didn’t do away with it completely. If we have a pill and if we use it, we have to get shareholder approval by the end of the fiscal year. It gives the shareholder a bit more say. The pill is a powerful protection, otherwise you leave the company exposed. I’m not so concerned about majority voting. Most of the directors are getting 95 percent of the vote anyway.