Bill Baue and Marcy Murninghan have authored a recent working paper that deserves wide circulation and thoughtful consideration. The Accountability Web: Weaving Corporate Accountability and Interactive Technology can be downloaded from the website of the Corporate Social Responsibility Initiative at the Harvard Kennedy School of Government. Since I’m trying to get you to read the paper, I’ll provide just a small taste. Then I’ll show how it might be applied to the corporate governance functions at public pension funds, as an example. Let’s start with a very abbreviated version of the introduction in the Executive Summary:
Corporate accountability and Web 2.0 share a common thread: both are rooted in interaction and thrive on engagement. This overlap creates opportunities for corporate accountability and Web 2.0 to join forces to create mutual benefits for firms and their stakeholders. However… current business use of Web 2.0 tools focused more on improving performance and increasing efficiencies inside the firm, and on brand management, customer relations, or crisis management outside it.
At a time when our economy is navigating a crisis, and public trust of business activity is in short supply, the intersection of concerns about corporate sustainability, accountability, transparency, and ethics with the proliferation of Web 2.0 communication tools offers an opportunity for new forms of collaborative leadership and participation… an evolution in the concept of who is “inside” and who is “outside” the organization.
Accountability 1.0 is marked by one-way proclamations, campaigns, and PR communications. Accountability 2.0 rests on the assumption of two-way communication, cooperation, and mutual engagement.
Almost anyone will find the tale they weave informative, even entertaining. For example, from a section titled “The Progression of Corporate Accountability,” they start with what may be the first case of stakeholder activism, soon after the Dutch East India Company launched their initial public offering.
Dutch religious pacifists, appalled by the reliance of the company’s business model on the “generous application of warfare, blockade, piracy, assassination, imprisonment, plunder, terror, slavery, [and] bribery,” campaigned by lamplight house-to-house to gather signatures for a notarized public petition, to boycott investment, and to make a show of selling shares in protest (Baue 2008; Davis et al. 2006:175-6).
Let’s take a quick look at the paper’s recommendations, greatly abbreviated here:
- Adapt, Don’t Just Adopt. Don’t just extend your existing model, use Web 2.0 for engagement/dialogue to enhance accountability.
- Cultivate Participation. Build community and technology in parallel; don’t assume if you build it, they will come.
- Develop Clear Terms of Engagement. Electronic media is susceptible to misunderstanding. Set guidelines for critiquing practices and policies, not people. Use assessment and feedback mechanisms to identify keys to success and flag problems.
- Foster Mutual Accountability. Model self-accountability, when asking other parties to hold themselves accountable, to create a culture of mutual accountability.
- Use Blended Engagement. Augment Web-based communication with face-to-face meetings, choosing the medium based on which is most likely to serve the objectives.
- Broaden the Media Palette. Social networking, augmented reality (AR) and wikis tools may be pushing the envelope too quickly, try them internally first to unfreeze thinking.
- Build Communities of Inquiry and Practice. Utilize experts with experience in building communities of inquiry and practice to convene, facilitate, moderate, and/or curate online engagement.
Like corporations navigating the financial crisis, public trust of public pension funds is also in short supply. Many have suffered scandals around placement agents, face huge deficits because of falling portfolio values, are resented by taxpayers who have lost their own defined benefit plans, and are always vulnerable to funded attack by money managers who want the profits that would incur if public employees were converted to defined contribution plans. The most powerful adversaries of public pension fund might be organizations, like the Business Roundtable and the US Chamber of Commerce, that represent top corporate managers. The more coordinated and powerful shareowners are, the likely directors will represent their interests in corporate boards rather than acceding to every whim of management. The percentage of the profits taken by top management has gone from about 5% to 10%. It isn’t hard to imagine they want to keep it and public pension funds have taken a leadership role in weakening the power of the imperial CEO… for example, by advocating the roles of CEO and board chair be split.
Public employees want to keep their defined benefit plans. They know their pension funds are under attack but they often have little understanding of how corporate governance plays a role in the earnings of their plans or the dynamics of initiatives, legislation and other attacks that may be orchestrated by forces not easily identified, especially after the Supreme Court’s decision in Citizens United. Web 2.0 and Accountability 2.0 could offer public funds a way to integrate their corporate governance concerns about sustainability, accountability, transparency, and ethics with their own internal governance. These tools offer an opportunity for new forms of collaborative leadership and participation with their own stakeholders… an evolution in the concept of who is “inside” and who is “outside” the organization. By utilizing such tools, funds may not only increase the understanding of stakeholders (which might expand beyond unions and direct members to taxpayers and others) but they may also benefit from what Baue and Murninghan call “cultivating communities of inquiry and practice.”
Now let’s try to apply these recommendations to the corporate governance functions of public pension funds. At some funds, these functions may be largely contracted out or carried out by one individual. Other funds may have dozens of contractors as well as dozens of in-house staff. Therefore, I’ll divide them into basic and expanded activism practices. Most of these practices will be Web and Accountability 1.0 but some will move into 2.0 and be informed by the paper. I’m drawing heavily for large portions of the list from Council of Institutional Investor (CII) publications.
Basic Activism Practices
- Obtain useful information necessary to make activism decisions;
- Commit staff time to implementing an activism strategy;
- Adopt proxy voting guidelines that follow or improve upon a recognized corporate governance framework (see those of CII and CalPERS, for an example);
- Make the proxy voting guidelines available for public comment prior to adoption… using a 2.0 strategy, provide for and cultivate interactive comment and discussion, reaching out to unions and other interested parties who are also connected with members and taxpayers;
- Make sure fund proxies are voted by fund staff or by a specialized proxy voting service in accordance with the fund’s proxy voting guidelines;
- Adopt a process to handle “No” votes on directors;
- Provide for an override mechanism so the fund can vote individual proxies on a case-by-case basis, even if voting is otherwise delegated;
- Factor into share lending practices a mechanism to retain voting rights on a targeted basis;
- Obtain and post on the web an annual report on the fund’s proxy votes… using more of a 2.0 strategy, facilitate comment and discussion again after the fact, since there are often unanticipated proposals each year and we often learn a lot during proxy season;
- Disclose the fund’s proxy voting guidelines on the web site, or alternatively on CII or other web site;
- Go public with issues or views on proxy votes through press releases, Twitter, a blog or other mechanisms that move toward 2.o;
- Withhold votes from directors of specific companies and/or committees;
- Develop a methodology and strategy for communicating and engaging with portfolio company directors or executives… making use of pre-season webinars and other 2.0 mechanisms as forms of blended engagement to reach out to more companies efficiently;
- Coordinate action with, or support the actions of other shareowners through international networks like ICGN, national networks like CII, as well as state and local networks like the Los Angeles Area Pension Trustees Network;
- Weigh in with Congress, the SEC and others to improve investors’ legislative and regulatory environment… use or work with constituent groups to use web-based tools for electronic messaging and other advocacy efforts;
- Monitor the discretionary voting by investment managers of shares held for other clients to ensure alignment;
- File binding and/or precatory shareowner proposals… foster mutual accountability by modeling self-accountability before introducing proposals that are also applicable to fund governance;
- Solicit support (not proxies) for shareowner proposals or opposition to management proposals;
- Disclose shareholder initiatives to stakeholders and the public… solicit feedback and dialogue from stakeholders though surveys, webinars and other methods before filing to ensure support or at least acquiescence;
- Use contract provisions based on standards of behavior to ensure that financial advisors are responsive to corporate governance principles;
- Employ managers and investment consultants who build shareowner value by emphasizing corporate governance reforms as part of their investment strategy;
- Use the legal system, such as filing class-action suits under the “lead plaintiff” provisions of the Private Securities Litigation Act of 1995 (see On Beyond CalPERS: Survey Evidence on the Developing Role of Public Pension Funds in Corporate Governance by Stephen J. Choi & Jill E. Fisch);
- Work with CII members and others to develop a backbench of potential director candidates with a wide variety of skill sets;
- Disclose proxy votes in advance of AGMs on web site, through RSS feeds, ProxyDemocracy.org, MoxyVote.com, and other such sites as the develop;
- Develop your reputation as a voting “brand” (see Proxy Voting Brand Competition at http://votermedia.org/publications). One way to enhance your brand is to provide a brief reason for your vote. As sites compiling votes become more popular, canned votes and reasons will sway fewer votes as disclosures become more sophisticated and value their brand following;
- Develop education tools and games to help members with investments to supplement their pensions making use of mutual fund activism comparisons like those available at ProxyDemocracy.org;
- Use Twitter and/or a blog to broadcast votes and invite discussion, especially from stakeholders;
- Build communities around fund activism that will provide feedback, identifying success and flagging problems;
- Run a short slate of directors;
- Campaign to deny management a quorum in especially circumstances where the rules or procedures are inherently unfair (see Guest Commentary From Glyn Holton: Emergency at Intel and Intel Virtual Mtg Out for 2010 But Exploring Future with USPX
- Utilize corporate governance measures as part of an overall investment strategy. For example, GMI and The Corporate Library have both done studies showing that an index of funds weighted by certain corporate governance measures (mostly measuring risk) should lead to outperformance over traditional indexing;
- Work with the SEC to encourage the development of proxy advisory firms (PAFs) by amending rule 14a-8(i)8 to allow shareowner proposals that would allocate corporate funds to PAFs that undertake to offer proxy voting advice, including advice on director nominees, that is made freely available to all of a companies shareowners. See examples from Mark Latham that could be substantially modified based on more recent experience with university and municipal governance to make them more easily implemented. For more recent language, click here (Consider that RiskMetrics probably spends an average of less than $4,000 researching each proxy and think about how much more company specific recommendations can be made if $50,000 is allocated to PAFs by shareowners, partially from corporate funds.);
- Model self-accountability to your own stakeholders in ways similar to how you think corporations should be responsible to shareowners by transitioning from one-way communication to two-way or multi-directional interactivity.
Expanded Activism Practices