by Jim Surowiecki
October 10, 1997
In 1965, Peter Drucker, one of America's most important management theorists, had this to say about individual shareholders: "The stockholder in the modern corporation is neither willing nor able to exercise his legal sovereignty. In the great majority of cases he never casts his vote but signs a proxy made out beforehand to and by the management. He exerts no influence upon the selection of new managers who are chosen through co-option by the management in power. The stockholder exercises no influence upon the decisions of management. As a rule he neither confirms nor repudiates them; he does not even know about them and does not want to know about them."
A gloomy picture, indeed, at least if you believe that institutions function best when leaders are supervised and feel some measure of responsibility to those whom they represent. But Drucker's description seems fair. And while things have changed in important ways over the last three decades, in its essentials Drucker's critique remains resonant, at least with regard to individual shareholders. Shareholders who try to effect real change in the corporations they own are still seen primarily as cranks, and in many cases rightly so. And the vast majority of shareholders would no more think of attempting to influence the decisions of a company's management than they would think of attempting to run for political office. It's simply an option that's outside the range of real possibility.
In the past three weeks, Rogue has outlined a series of necessary changes in the structure of corporate governance and pointed to the way those changes might help encourage shareholders to take more responsibility for the companies they own. Here, we want to suggest why that responsibility is important and also make some tentative suggestions for how that responsibility might be exercised in ways that are beneficial to more than just a corporation's stock price.
The crucial phrase in Drucker's description of shareholder apathy is "neither confirms nor repudiates them." The reality of shareholder life in America is not that shareholders are blissfully content with the performance of American corporations, nor do they necessarily approve of corporate policies regarding foreign labor, the environment, unions, dealings with repressive regimes, executive compensation, or public safety. The reality is that we don't know how shareholders feel about what corporations do because only rarely do they take the opportunity to tell us. Most shareholder meetings are under-attended, except in the case of companies like Apple, which inspire unusual devotion, or in the case of companies that are undergoing tremendous turmoil. Many, perhaps even most, proxies go unvoted.
Perhaps most tellingly, public comment from individual shareholders is essentially non-existent. Should Nike be sub-contracting its production work to Southeast Asian factories in politically repressive countries like Vietnam and Indonesia? When that question is debated, we hear plenty from Nike spokesmen and from labor-rights advocates, and from Michael Jordan. If we're lucky we may hear from a fund manager. But what about individual Nike shareholders? How do they feel about owning a company with these employment practices? Would they like Nike to change, or do they believe that things are fine the way they are? These are important questions, but rarely -- if ever -- do we hear them asked.
In part, of course, that's because there's no obvious mechanism by which the press can find individual shareholders for comment, and in part that's because it's not clear how much thought Nike shareholders have really given to the matter. In their 1967 call for shareholder activism, 20 Million Careless Capitalists, Carter Henderson and Albert Lasher wrote: "If you are one of the more than twenty million Americans who own stock in U.S. corporations, chances are you know only one fact about your investment -- how much your shares were worth at the close of yesterday's stock market." While things are undoubtedly better today for many individual shareholders -- most investors who come to The Fool, for instance, know a great deal about the financials of the corporations they own -- things are probably not much better in terms of shareholder understanding of the world outside the balance sheet.
This abdication of shareholder responsibility is dangerous from an economic perspective and does real damage to the quality of American public life because it keeps a whole host of issues from real discussion. At a time when concerns about the impact of globalization are widespread, and when even unusually low unemployment has not effected any real change in the stagnation of middle-class income, those who own American corporations have an obligation to think seriously about the role corporations play in our society and the way that role might be improved. Corporations are, after all, not a natural way to organize production in a society. They are creatures of a particular set of social and legal arrangements that allow individuals -- and, now, institutions -- to pool their money to create organizations for the purpose of making a given product. As such, their existence needs to be continually justified, and the best way to do that is to demonstrate that they are contributing to the common good in a way that cannot be equalled by any other social or legal arrangement.
In its essence, then, shareholder activism should consist in the first place of shareholders acknowledging their responsibility for corporate actions and seeking to influence those actions through proxy votes, attendance at shareholder meetings, participation -- even if only passive -- in conference calls, and, ideally, public comment. Shareholders should agitate for the free and public dissemination of all material information, attacking current practices that privilege Wall Street analysts over the rest of us. And shareholders should insist that boards of directors be independent of management. Ideally, the nominating process should be streamlined that so shareholders -- perhaps organizing over the Internet -- might play a role in the nomination of independent candidates. In any case, the familiar practice of rubber-stamping management nominees is one that should come to a rapid end.
Shareholders should demand more than simply news of changes in product lines or future profit expectations, though. As publicly owned entities, corporations have no authority to hide their employment practices, investment decisions, or back-room dealings from their owners. As a result, shareholders concerned, for example, about Unocal's continued business operations in Burma, which is ruled by a repressive military junta, should ask Unocal for a full accounting of their operations there and for an explanation of the relationship between the corporation and the military regime. Similarly, Nike shareholders deserve a clear and aboveboard account of employment practices in Southeast Asia, with special attention given to how much Nike workers make relative to other shoemakers and relative to the region as a whole. There is no excuse for a public corporation to hide relevant information from its shareholders.
In the long run, shareholder activism might usefully take the form of establishing a set of minimum standards for corporate behavior both at home and abroad, a set of standards that could then be used to evaluate a company's performance and to point out situations where improvement was necessary. Among the items that might be included in such a set of standards would be: ratio of executive compensation to median employee compensation; a link between executive raises and performance of company relative to its industry as a whole; treatment of foreign workers; workplace injuries; and the existence of employee stock option plans. At its heart, the idea is not to place undue burdens on particular American corporations, but rather to raise the floor for all corporations, and to institutionalize the recognition that corporations are responsible for more than just their share price.
In 1966, the director of a Fortune 500 corporation spoke at a Columbia University symposium: "[T]he thing that will make the majority of the American people think that the American business setup is the best thing for the country, as compared to some other form of activity, is a composite picture; it's how you treat your employees; it's how you live in your community as a corporate citizen; it's how your management people conduct themselves; how you cooperate with government, what kind of product or service you give your customers -- a composite of all these things.... And I think that a person that has that kind of a concept about corporation management responsibility is definitely looking after the interests of stockholders." We couldn't agree more. And next week Rogue will provide a rough draft of how individual shareholders might come together to make that concept of management responsibility more of a reality.