“CalPERS had made a conscious decision to become part of a new movement of institutional investors that would perceive a fiduciary obligation to pay attention to the voting process. They were holding stock in the name of all their participants, all the state employees, and they could not just willy-nilly vote for management. They had to read the proxy statements, they had to figure out what was going on, and they had to decide from a fiduciary standpoint what the right thing was to do. And that whole movement was beginning then. You could say it was the greening of ERISA.”
In 1981, Harold Williams predicted that the dominant issue in the coming decade would be the “power of ownership and how it might be used and by whom.”28 Perhaps the most significant development in corporate governance in the 1980s was the rise of activists with investments - pension plans, insurance companies and mutual funds - large enough to give them a voice on how management ran their companies.
At mid-century, institutional investors held only 8% of the stock of the nation’s largest companies. By 1988, they owned 45% of the shares in the 100 largest companies, and that proportion was still increasing. These large holdings made them heavily dependent on corporate fortunes; even if they were dissatisfied with management, they could not divest without driving prices down. Thus, institutional investors looked to governance as a way to protect their investments.
One avenue of entry into the corporate governance process was public pension law. In October 1974, as venerable corporations, including their pension funds, crumbled under the impact of stagflation, the federal government passed the Employee Retirement Income Security Act (ERISA), which set standards of protection for individual beneficiaries and assigned fiduciary responsibilities to corporate managers. In 1988, the Department of Labor, which administered ERISA, informed the management of the Avon Corporation that among those fiduciary responsibilities was access to proxy voting. The issuance of the “Avon letter” widened the federal foothold on the corporate governance edifice.29
At about the same time, institutional investors began seeking to use their influence to advance social agenda. Harrison Goldin, Comptroller of the City of New York, served notice in May 1974 that “the city will use its rights as a large shareholder in major corporations to promote socially responsible policies and performance.”30
A decade later Goldin joined with likeminded officials Jesse Unruh, California State Treasurer and trustee of the California Public Employees Retirement System, and John Konrad, State of Wisconsin Investment Board, to form the Council of Institutional Investors (CII). In the same year, Institutional Shareholder Services (ISS) was founded, the first of a group of firms dedicated to evaluating corporate governance, rating companies based on it, and providing guidance to investor groups.
These groups took their initial steps amid the uncertainty of the takeover wave. CII’s first effort was to intervene in raids on Phillips Petroleum by T. Boone Pickens and Carl Icahn. Goldin noted that the CII did not oppose takeovers on principle, but only wanted to make sure that shareholders got the best deal possible. Tired of being taken for granted by management, CII proposed its “Shareholder Bill of Rights” in 1986, calling for equal voting rights for all shares and equal treatment of all shareholders. It advocated for shareholder votes on management actions, particularly the implementation of anti-takeover measures, and for outside directors to have authority on audit and nominating committees. CalPERS wrote to the SEC to push for rulemaking, starting a vigorous debate about proxy requirements which ultimately led to rulemaking. By speaking on behalf of all shareholders, institutional investors increased their own considerable clout in dealing with corporate governance.
By the late 1980s, management started to listen. Once, noted a corporate director at the time, board service meant only “coming to meetings, listening to reports, having lunch, and collecting your fee.”31 But with pressure from takeovers and institutional investors, boards began doing their homework, so as to better hold management accountable.
A reminder of the rising power of institutional investors came at General Motors. In 1986, GM bought out billionaire Ross Perot at a premium. This was an affront to institutional investors which did not get the same consideration. Under pressure from Harrison Goldin and other shareholder activists, GM launched a campaign to mollify institutional investors. A few years later, institutional investors again clashed with GM after a period of poor performance. When CEO Roger Smith countered that, if investors did not like the way the company was managed, they could sell their shares, investors launched a revolt instead and worked with outside directors to replace management. This accomplishment served as a wakeup call to many companies.32
Not everyone considered increasing shareholder power a good thing. Some believed that institutions did not represent small shareholders and countered that their organized efforts drowned out small shareholder voices. Others argued that shareholder activists focused too much on share value, forcing management to emphasize short-term performance at the expense of the long-term health of the company. Despite these reservations, organized institutional shareholder power was here to stay, critical in any battle for corporate control, and the best chance any small shareholder had at gaining a voice in corporate councils.
(28) March 8, 1981 Washington Post, “An Attempt to Learn if Shareholders Really Care.”
(29) July 1, 2013 Interview with David B.H. Martin.
(30) May 24, 1974 New York Times, “City Pension Stock Will Vote Against G.M.”
(31) April 1989 Institutional Investor, “Outside Directors Feel the Heat.”
(32) May 22, 1987 Wall Street Journal, “G.M. Annual Meeting Will Reflect Firm’s Effort to Woo Holders, Analysts;” December 13, 2003 Roger Lowenstein, New York Times, “A Boss for the Boss.”
