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The Decade Of The Proxy

In the fall of 1987, writing in Chief Executive (Speaking Out, September/ October, p. 8), I began to worry about the increasingly active role played by large institutional investors. Would they become bigger-than-life corporate gadflies, endlessly hassling over matters of governance, takeover provisions, and special interest proposals? Would they barge into the sanctified areas of …

In the fall of 1987, writing in Chief Executive (Speaking Out, September/ October, p. 8), I began to worry about the increasingly active role played by large institutional investors. Would they become bigger-than-life corporate gadflies, endlessly hassling over matters of governance, takeover provisions, and special interest proposals? Would they barge into the sanctified areas of management performance, compensation, succession, and-perish the thought-director nomination and election? Here loomed one more complicated distraction for the CEO who already had his plate full of a growing list of priority problems that demanded his personal attention.

Now, three years later, pension funds have grown another 50 percent, mutual funds keep replacing individual investors, and their managers are speaking up with their voices and speaking out with their proxies. It is happening even faster than I thought it would. So let’s take another look at it.

Most of the turbulence is centered around the big state pension funds, a few private money managers, and a couple of organized stockholder groups. Though small in number, these institutional investors are being taken seriously. They have a lot of clout, and they know it. They are also attracting a lot of attention; the magazines and newspapers are particularly enthralled with the subject.

What are they after? Some of the aggressive funds, such as the California Public Employees Retirement System (CALPERS), have asked companies such as Texaco to elect a director suitable to them. Others, such as New York State and Local Retirement Fund, have asked companies such as General Motors to discuss management succession with them. Many are participating vigorously in proxy squabbles at companies such as Honeywell, Armstrong, and Occidental Petroleum. Nearly all are communicating persuasively to the Securities and Exchange Commission as it studies a revision of proxy rules. There is now even a consulting firm that specializes in helping funds prepare and file resolutions at companies whose corporate governance policies they wish to oppose.

Recently, I chaired a panel of a dozen experienced directors, assembled by Boardroom Consultants, to discuss this situation and to consider what CEOs should be doing about it. Let me share some of their observations with you.

  • The role of the institutional investor is going to continue to grow larger. The fund managers will become more active, more strident, and more involved in more corporate performance matters.
  • Where these investors own a significant percentage or dollar amount of a company’s stock, they will become more and more interested in the board of the company-its membership, policies, and posture.
  • CEOs need to reappraise their investor relations programs to make certain that they are staying abreast of their institutional holders and are keeping them fully informed as to their corporate programs and progress.
  • Just as they do with large individual stockholders and with financial analysts who follow their industry, CEOs and their top executives need to keep in personal touch with their major institutional investors. This is even true, perhaps particularly true, when the institutional investor is known to have a contrary opinion on a key corporate policy.
  • As the corporate raiders move from hostile tender offers into proxy fights, they will be beseeching the pension fund to join sides with them when the vote casting starts. This is already happening at companies such as Lockheed and Avon.
  • There will be more state and federal actions that will revise present proxy rules and will lead to a host of new interpretations as loopholes are sought and found.

The answer for CEOs seems to be to recognize that this is the way it is going to be in the 1990s. The shareholders still own the company. The reality is that many of these institutional investors have what they perceive to be vested interests-legitimate or otherwise-in changing corporate policy. For better or worse, this is going to include changes in management and directors. When and if the mix and the interests of shareholders change, your shareholder relations program has to change along with them.

It isn’t going to be easy. Some of these fund managers are going to be extremely biased in regard to certain issues. Others will have unique local issues and viewpoints that are at variance with your global approach. Lots of them will have short-term, stock price improvement goals that run ahead of your plans. Hindering the situation even further, not all of them will even give you the time to talk.

I think that one of my panelists summed it up pretty well when he said, “You gotta go see ‘em , talk to ‘em, and convince ‘em that you are moving your company in the right direction and managing it for the benefit of long-term shareholders.”


Formerly the CEO of F.&M. Schaefer (19721977), Robert W. Lear teaches at Columbia Business School where he is Executive-inResidence. He is an independent general partner of Equitable Capital Partners and holds directorships with Cambrex Corporation Inc.; Crane Company; Scudder International and Scudder Institutional Funds; Korea Fund; Medusa Corporation; WICAT Systems Inc.; and Welsh, Carson, Anderson, Stow Venture Capital Co. His latest book is How to Turn Your MBA Into a CEO.

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