If you know anything about Lewis D. Gilbert, you probably know that when he attended his first shareowner’s meeting, at New York City’s Consolidated Gas Company in 1932, he was ignored by the chairman when trying to ask a question. Gilbert felt he had been “publicly humiliated by one of my own employees.” He quit his job and established a new avocation, “devoting all my time to the cause of the public shareholder.” Shareowners of today owe Gilbert a debt of gratitude, since we benefit from his victories. However, we should also live by his admonition, “Rights are won by exercising them. Rights are lost by default when they are not used.”
Gilbert’s times were somewhat similar to ours. Instead of the Great Recession, it was the Great Depression, Instead of Congressional hearings on Goldman Sachs and the Financial Crisis Inquiry Commission, Gilbert’s contemporaries heard testimony before Senator Pecor’s committee. In many instances, management had taken control of companies from widely dispersed shareowners through the proxy machinery. Management had become all-powerful, often “withholding voice, information, and the possibility of effective action from shareholders,” who bore the cost of solicitations through the company’s treasury but had little or no input into the content of proxies.
The Securities and Exchange Act of 1934 was passed “in the belief that shareholders could not vote effectively until they had adequate information and the right to communicate with each other.” With prompting by advocates like Gilbert, the SEC soon required proxies to include disclosure of top salaries, bonus and profit-sharing plans, pension and retirement plans, as well as income received through the sale of sock and options.
Gilbert was instrumental in winning a formal SEC rule in 1943 that shareowner proposals be included in the proxy. He soon recognized that rules are not self-enforcing but depend on shareowner vigilance. After many challenges, the SEC’s powers were finally sustained in the 1947 case, SEC v Transamerica, when judge John J. Biggs Jr. ruled, “a corporation is run for the benefit of its stockholders and not for that of its managers.”
Gilbert’s book, Dividends and Democracy, mostly recounts the drama of dozens of annual meetings, where he asked pointed questions and initiated motions from the floor. Since hundreds of shareowners actually gave Gilbert their unsolicited proxies and the advance notice and other rules regarding issues that could be raised weren’t as restrictive as they are today, readers get the sense that annual meetings meant much more in Gilbert’s day. An abbreviated list of the goals he struggled for includes the following:
- Accessible and democratically conducted meetings, “televised from coast to coast through a closed circuit.” Shareowners won’t tolerate a meeting “entirely confined to written questions” because it “encourages suspicion that only planted questions are answered while the rest are ignored.”
- Detailed post-meeting reports – Gilbert wanted not only voting results announced, he wanted reports to include questions and answers, who asked and answered each.
- Election of auditors by shareowners. Gilbert recounts auditors who allowed company funds to pay for “jewelry, groceries and clothing.”
- Annual voting for all directors – “The stagger system is a frank device to lessen the control of stockholders and to perpetuate management continuity and domination regardless of shareholder wishes.”
- Cumulative voting – “Cumulative voting provides a safety valve, prevents serious proxy fights, stimulates a company through minority scrutiny, often increases its earnings and does all this without sacrificing or diminishing majority control.”
- Proxy access – “The most vital proxy reform, in my opinion, is provision that independent nominations, or either a single candidate for the board of directors or an entire insurgent slate, must be carried in the management proxy statement,” since it is not “management’s” and all shareowners share its cost.
- Limiting the amount a company and insurgents can spend on a proxy fight, based on size of the company and number of shareowners, so as to not drain corporate treasuries.
He advised investors to pay special attention to the amount of stock held by directors, compensation, loans, business relationships between the firm and its directors… and he did it all without the benefit of The Corporate Library’s “Board Analyst” database.
While Lewis Gilbert is certainly the central figure in his autobiography, he does recognize the contributions of many others. Here are a few that struck me:
- Father David C. Bayne – “If we once operate on the premise that the American investor has not only a right, but a stringent moral duty and responsibility to guard, watch over and direct his property, we will accord him his just voice in the control of the corporate destiny and affairs.”
- Professor Mortimer Caplin – It is commonly called management’s proxy but management did not pay for it; the corporation did, and therefore it should be the vehicle for all the stockholders and not a propaganda instrument for management only.
- Wilma Soss, founder-president of Federation of Women Shareholders in American Business and who struggled to get women on corporate boards – The practice of crediting millions of unmarked votes to management should be discontinued.
Long before the 2010 Supreme Court decision in Citizens United v. FEC, Gilbert recognized that “we cannot have good political government unless we have good corporate governments,” since “our political leaders reflect the thinking of the corporate world.” “Participation in the nation’s business is the only real democracy in a modern world where it is indisputable that industry and finance are primary even in the field of political decision.”