By Jim Surowiecki
For the last two weeks, Rogue has set forth our vision of the kinds of changes in corporate governance that we believe are necessary in order to make corporations truly accountable to their shareholders. Underlying our advocacy of these changes is the faith that the more accountable managers are, the more successful they will be, as well as the more general principle that those who own a company should have a say in the way it's run.
The idea of shareholder rights, though, only takes on real meaning when it's combined with a sense of shareholder responsibilities. In other words, while it will be a good day when Compaq discloses its plans for the future in a public fashion and not in a closed-door meeting with analysts, the real value of that transformation will go unrealized if shareholders fail to take the opportunity to play a larger role in shaping the future of the corporations they own. Democracy, in that sense, only exists when people exercise their rights.
The truth, of course, is that most of us, even those of us who consider themselves long-term investors as opposed to speculators, feel as if we have neither the time nor the energy to play an active role in corporate governance. At a time when fewer than half of all Americans even vote in national elections, expecting investors to become what we might call "citizens of the corporation" may seem like a utopian vision. Nonetheless, the value of such involvement is unquestionable. As Robert Monks and Nell Minow said in their book Power and Accountability, "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."
Insofar as more active shareholders increase corporate accountability, then, they contribute to the commonweal. Not incidentally, they also help improve the relationship between corporations and the larger public.
Even if the value of shareholder activism is clear, though, the actual incentives for any one individual investor to act are essentially non-existent. In other words, it's improbable that anything you do will improve a corporation enough -- financially or otherwise -- to make it worth your while. In purely rational terms, it makes more sense for you as an individual to sell your stock if you feel the company is going off the rails, or to sit quietly if you think it's doing okay.
The problem, of course, is that what's rational for the individual is not necessarily rational for the group. It's unlikely, after all, that your one vote will decide who becomes President. But if everyone who supports your candidate feels the same way and stays home, then those individually rational decisions will produce a collectively disastrous outcome. Similarly, if individual investors continue to toss proxy statements into the trash and to pay more attention to the ticker than to 10-Ks, corporations that might otherwise be dramatically improved will continue on their merry, ungoverned way.
Perhaps even more importantly, a commitment on the part of individual and institutional investors to long-term investing will help assuage many of the concerns that have helped impede the advance of shareholder activism. Primarily because in the 1980s shareholder activism was associated with figures like T. Boone Pickens, who seemed more interested in taking over companies and selling off productive assets than he did in improving long-term performance, changes in corporate governance tend to be seen as ways to make mergers and buyouts easier to accomplish. And the short time horizons of many investors -- which corporate managers insist has forced them into a quarter-to-quarter mentality -- have led them to favor short-term improvements over the kinds of investment that yield long-term growth. The combination of these factors has encouraged those critics of shareholder activism who argue that making corporations more accountable to investors will necessarily mean sacrificing the long-term health of the corporation for short-term upticks in the stock price.
In that sense, the more involved investors become in corporate governance, and the more committed they become to the idea of themselves as owners rather than as short-term riders, the more respectable shareholder activism will become. There is, to be sure, a kind of chicken-and-egg problem here. It's difficult to think of yourself as an owner if you have almost none of the rights that an owner should be able to exercise. In other words, if you own Pennzoil and Union Pacific makes a tender offer that's $15 above the current share price, it's hard not to tender your shares even if you think that Pennzoil would be better off remaining an independent company, because the way things are set up it's hard to be concerned with anything but the share price.
If you owned Pennzoil outright, you might very well turn down the offer, since that $15-per-share profit might pale next to the long-term gains you thought the company would realize, or since you might believe that you could accomplish more on your own than under Union Pacific's thumb. But as a shareholder, it's difficult to feel that kind of allegiance to a company. And since most corporations still don't do a good job of communicating with their investors, it's also difficult to evaluate, in purely financial terms, whether Union Pacific's offer is fair.
The changes we recommended in the last two weeks, then, are designed in no small part to create a framework in which shareholders might come to identify themselves as owners. And that identification is the fundamental first responsibility of any shareholder. In coming to think about the corporations you own as firms in the real world rather than simply symbols on the stock ticker, you come to place the long-term interests of those corporations above the short-term fluctuations in their stock prices. That, in turn, creates an environment in which managers can no longer use the "short-term pressure" excuse to justify bad decisions, and in which the exclusion of individual investors from conference calls and other forums in which material information is disseminated can be seen as the unjustifiable and, in fact, illegal practice that it really is.
The burden, then, falls on both sides of the equation. Corporate governance standards need to be altered in fundamental ways to encourage a much more active role on the part of shareholders. At the same time, though, shareholders need to be willing to play that active role, and to do so in a way analogous to the role played by the best managers, selecting directors who will emphasize the future over the present, who will seek sustainable growth over quick-fix solutions, and who understand the relationship between improvements in productivity and the creation of wealth.
The real problem for individual investors, of course, is how to gain some kind of collective voice. Many institutional investors, after all, are already playing an active role in the corporations they own. The dismissal of CEOs at corporations like IBM, General Motors, and Eastman Kodak was almost entirely the result of active investor involvement. But individual investors collectively have nearly as large a stake in many Fortune 500 corporations as institutions do. And the reality of the corporate system is that calls for change do not have to be incredibly loud to have an impact. They simply need to be well publicized. In the next two weeks, Rogue will set forth a sketch of how individual investors might come together to effect change at corporations, and also point to the kinds of change that might be both possible and desirable. The era of Investor Capitalism may have arrived in some parts of corporate America, but there are still a lot of places that haven't yet gotten the news.