Corporate Governance in the Internet Age

One reason, among many, for the instability in Asian markets may have been lack of information provided to shareholders…transparency. There are a growing number of people in the U.S. and around the world who recognize that free discussion and shareholder participation in corporate governance adds value.

What will corporate governance be like in the Internet age? I’m not an impartial observer. However, I do think the Internet will help facilitate the growth of democracy. Just as many firms have recognized that they gain much from allowing employees to have a voice in their company, so too, they will find that being open to shareholder participation is also important. This is especially true where capital can easily flow between markets and shareholders are networked via the Internet.

My plan for this discussion is to move more or less chronologically from pre-internet history, to establish the corporate governance setting in the United States. Then I’ll focus most of my attention on various “landmarks” that have struck me over the past several years observing corporate governance on the Internet. Last, I’ll turn to more recent developments and offer a few speculations on the future.

Unfortunately, I’ve been focusing primarily on the U.S. but I’m eager to know more about corporate governance in Korea and Japan, especially how the Internet has been or may be used. I hope we can learn from each other’s experience and ideas.

Background: the U.S. Setting

Initially, most shareholders lived in the same community or within a short distance so they could easily attend the annual meeting to make the most critical decisions. A legal framework developed over time to ensure a minimum amount of protection for individual shareholders. However, with the protections of law, ownership became more dispersed throughout the country and the balance of power began to shift and management took disproportionate control.

As a partial remedy, the Securities and Exchange Commission (SEC) was created to oversee trading abuses and to insure that shareholders were given more information. Still, the balance of power remained squarely with management until 50 years later in 1984 when Jesse Unruh, treasurer of California read that Texaco had repurchased almost 10% of its own stock from the Bass brothers at a $137 million premium. Essentially, Texaco’s management paid “greenmail” to avoid loss of their jobs in a takeover. CalPERS was also a large shareholder but, of course, wasn’t given the same option.

Unruh started the Council for Institutional Investors and their activism led the SEC to ease the rules governing communication between shareholders in 1992. Soon thereafter, the World Wide Web began to connect shareholders. The locus of power may now be gradually shifting back to shareholders as the residual owners companies.

And, from a recent Conference Board report, individual investor ownership in the largest 1,000 U.S. corporations is increasing from 41 in 1997 to 42% 1999. Online trading and employee stock ownership mean companies in the U.S. will need to pay more attention to individual investors who increasingly get their information on the Internet. By the end of the year, about 1/2 of all U.S. adults will be logging into the Internet on a daily basis.

There is a growing demand among the invested public to have some say in how “their” corporations are governed. This is most readily apparent with the growth of “socially responsible” mutual funds and union influenced pension funds that use some screens on what they believe are unethical investments. Such funds currently hold $1 out of every $8 invested by institutions on Wall Street. These funds are most likely to drive Internet activism in corporate governance.

LandmarksCraig Mackenzie published the ‘Shareholder Action Handbook’ (NeConsumer, 1993, pp.168, UK).

• SEC puts up their Electronic Data Gathering, Analysis, and Retrieval (EDGAR) which contains a not very user friendly database of SEC required filings. However, soon EDGAR will include hyperlinks, graphics and more. (see March 17 outline)
• LENS, a value investor then operated by Robert Monks and Nell Minow, used the Internet to explain their strategies and seek support for their positions. Teaming with mostly with public pension funds, their involvement helped bring about major changes at companies like Sears, Kodak, American Express and Scott Paper.
• Corporate Governance (Corpgov.Net) puts up the proxy voting guidelines of TIAA-CREF, CalPERS and others in 1995. We start covering some of the democratic trends in corporate governance.
• Japonica Partners (managed by Paul Kazarian) highlighted their current investment plans and solicited input from institutional investors.
• Bennett LeBow and the Brooke Group took their proxy fight against RJR Nabisco into cyberspace, posting all proxy materials on the home page of their proxy solicitation firm, Georgeson Shareholder Communications.
• Council of Institutional Investors starts an interactive forum, with the editor of CorpGov.Net as its most frequent poster. They soon took it down.
• CalPERS site goes up. They use the Internet to solicit support for shareholder proposals at the annual meeting of Archer Daniels Midland in October 1996. They also targeted underperformers and put up their corporate governance policies. Eventually they put up a shareowner’s forum. However, it includes only opinions of Board and staff.
• Also in 1996, a group of small shareholders in a $271M community bank in Santa Monica, California ran a dissident slate of four and won control of the board. CEO’s pay was the main issue. (see Banking Today)
• Bell & Howell broadcast its 1996 annual meeting; In May 1996, Bell & Howell became the first major company to conduct an online annual meeting. 40 people attended in person, nearly 1,800 via Internet.
• Webcasting of analyst calls Currently, 83% of companies conduct conference calls and 82% of those allow individual investors to listen in, up from 29% two years ago and 48% webcast the calls, according to a study sponsored by the National Investor Relations Institute.
  See also http://www.businessweek.com/1999/99_21/b3630027.htm
  http://www.StreetFusion.com
  http://www.shareholder.com
  http://vcall.com
  Another excellent source of information about what companies are doing to encourage good investor relations is a recent study sponsored by the Financial Accounting Standards Board. The “Business Reporting Research Project” is available at their site on the Internet.
• European Corporate Governance Network posted governance policies, developed a listserv and posted papers. They seem to have the best list of best practices reports and its probably the best place to post a question on corporate governance and get an answer.
• In 1998, investors in the Emerging Germany Fund, a closed-end mutual fund, used an Internet bulletin board to discuss the fund’s poor performance. Phil Goldstein, who operates a $40 million hedge fund, advised the Fund of his intention to nominate his own slate of directors. The fund’s lawyers noticed postings on the Internet suggesting that shareholders send Goldstein their “unsolicited proxies.” The fund sued but the case was dropped after they spent over $500,000 in attorney fees. (see Do Shareholder Activists Violate Federal Proxy Solicitation Laws Through Internet Message Boards?)
• 1999 United Companies Financial (UC) shareholders posted a message on the Yahoo Internet message board and 6,000 postings later the group of small investors successfully obtained a place, normally reserved for large creditors, in a bankruptcy hearing. (seeUnger: Dealing with the Wired Investor)
• AFL-CIO’s Executive Paywatch; workers can log in and see how many years or lifetimes it will take them to earn as much as their CEO earns in one year. The most recent survey is that the average CEO of a large firm earns 429 times what the average worker earns. When I was “poor” kid growing up in a neighborhood of corporate CEO’s the ratio was something like 1 to 20 or 25.
• Mark Latham’s corporate monitoring project. Hiring a proxy advisory firm chosen by shareowner vote will give shareowners independent information and a more powerful voice in corporations.
• World Bank Forum: focused mostly on developing countries has sponsored forums which focus on a topic for a limited timeframe.
• OECD Forums: I believe the primary focus has been on converging best practices.
• Friends of the Earth’s online “Confronting Companies Using Shareholder Power: A Handbook on Socially-Oriented Shareholder Activism.” Includes case studies and how to respond to no-action requests to the SEC from companies.
• 1999. Disclosure of votes by Domini Social Investments and CalPERS
• SocialFunds.com’s Shareholder Activism Center – Allows readers to look up companies to see shareholder resolutions, provides information on the mechanics of voting and even provides a direct link to company investor relations departments so readers can send them an e-mail to voice their concerns.
• The Corporate Library. The best site on corporate governance. Includes library, news, links, list of significant resolutions and the results of original research such as Nell Minow’s effort at exposing CEO contracts.
• Allied Owners Action Fund and eRaider. Allied Owners Action Fund is a new mutual fund set to announce its first investment on April 28th. Like the LENS Fund, it will go after companies where shareholder action will unlock value. eRaider is an affiliated site with news, commentary and about 20 bulletin boards moderated by experts on topics ranging from accounting to stock picking. I’m the moderator on corporate governance. Right now there running a contest for teams of MBA who can win up to $5,000 for suggestions on what actions they can take as shareholders to increase the value of their first targeted company. Teams only have until April 28th to register.
• Rio Tinto (mining) first ever joint shareholder initiative sponsored by unions in Australia, the UK, and the United States. Issues are independent boards and human rights (right to organize labor). SeeCoalition of Rio Tinto Shareholders.
• Bart Naylor posting on submitting shareholder resolutions.
• PetroChina. Investment banker Goldman and Sachs had convinced government they could do an initial public offering for them to raise $10 billion. This was to be the first of several Chinese offerings through Goldman. However, the day after they filed their SEC documents, the AFL-CIO posted PetroChinaWatch.com on the Internet. They worked with Chinese dissidents, environmentalists and large public pension funds to line up opposition. The initial offering raised only $3B instead of the expected $10B. A week or two later the Financial Times of London reported that China was shelving the other offerings for now. See PetroChina Watch. Just before I left for Korea, I read that Japan’s ministry of finance is considering barring Goldman Sachs from advising it on privatisations – notably the next sale of government shares in NTT.

The Future

Proxy votes have been transformed from a meaningless gesture into a meaningful “asset” and a powerful tool for asserting shareholder rights. The next phase will be dominated by the Internet, which facilitates communication of proxy issues and allows direct communication with the beneficial owners. Those owners will increasingly try to hold corporate directors accountable, either directly, or through mutual, pension and other funds that keep them more fully informed about governance issues and how they may impact the bottom line.

These organizations will set up more sophisticated portfolio trackers that not only compile and update the ups and downs of their portfolio and provide news feeds on developments impacting their investments. They will also gather posted voting information that will tell you how various institutional investors such as CalPERS, Domini, and Citizens plan to vote and why. (see Mark Latham’s It’s Time for Stock-Vote-Bot)

Workers, who’s pensions own approximately 25% of the market, will demand that proxy voting policies and then the proxy votes of their funds be put on the Internet and they will then demand greater input and representation on their pension fund boards.

Parting Thoughts

Shareholder participation and free discussion add value to the firm. For example, a director faced with the real possibility of being replaced by shareholders will rationally choose to be more responsive to shareholder issues and avoid self-interested actions such as excessive compensation increases. They will have a greater tendency to direct in a manner beneficial to shareholders than do directors where shareholders can only note their displeasure by withholding their vote without an alternative.

In a democracy, there will be a positive correlation between the values of society and the value of investment. If the society values a clean environment, corporations that pollute it will lose value. They will get fined, receive bad publicity, get sued, lose market share and the stock will lose value. If it doesn’t work that way, we’ll have to change the government. SRI funds will continue to lead in using the internet to drive corporate governance.