In the wake of the shareholder revolt at Disney, some of the big institutional investors are feeling their oats. American Federation of State, County and Municipal Employees (AFSCME) and other union pension funds sponsored almost half the shareholder proposals on proxy statements during this annual meeting cycle. They're also among the leading advocates of the SEC's pending shareholder access proposal (which I criticized in an earlier TCS column). It was CalPers -- the big California public employee pension fund -- that made perhaps the biggest splash by recently announcing that it will oppose reelection of some or all of the directors of over 2700 companies.
The "perfect storm" metaphor has been overused to the point of becoming a cliché, but how else can one describe the Disney vote? We saw a combination of long-term performance woes, a widely disliked and autocratic CEO, a hostile takeover bid in the offing, and a crew of dissident ex-directors -- including a member of the founding family -- leading a shareholder revolt. The big question left open is whether activist shareholders can catch the same lightning in a more routine bottle.
A 1998 survey by Stanford law professor Bernard Black found relatively little evidence that shareholder activism matters in corporate governance except perhaps at the very margins. Most institutional investors historically spent only trifling amounts on corporate governance activism. Most devote little effort to monitoring management; to the contrary, they typically disclaim the ability or desire to decide company-specific policy questions. They rarely conduct proxy solicitations or put forward shareholder proposals. They tend not to try to elect representatives to boards of directors. They rarely coordinate their activities.
Does the recent spurt of activism on the part of pension funds like CalPers suggest a major shift in the behavior of institutional investors generally? It seems unlikely. The vast majority of institutional investors -- like banks, insurers, mutual funds, and private pension funds -- show little interest in corporate governance. At most, they may bring pressure on managers resisting a takeover.
Instead, activism is principally the province of a very limited group of institutions. Almost exclusively, the activists are union and state employee pension funds. They are the ones using shareholder proposals to pressure management. They are the ones most likely to seek board representation. As AFSCME chairman Gerald McEntee recently told LA Times columnist James Flanigan: "We're not looking to take over the corporation, but to have a voice through one or two or three seats on the board."
One might reasonably wonder what a public employee union knows about running business corporations. Might they have another agenda for board representation?
The interests of large and small investors often differ. As management becomes more beholden to the interests of large shareholders, it may become less concerned with the welfare of smaller investors. If the large shareholders with the most influence are unions or state pensions, however, the problem is exacerbated.
The interests of unions as investors differ radically from those of ordinary investors. The pension fund of the union representing Safeway workers, for example, is trying to oust directors who stood up to the union in collective bargaining negotiations. Union pension funds have used shareholder proposals to obtain employee benefits they couldn't get through bargaining (although the SEC usually doesn't allow these proposals onto the proxy statement). AFSCME's involvement especially worries me; the public sector employee union is highly politicized and seems especially likely to use its pension funds as a vehicle for advancing political/social goals unrelated to shareholder interests generally.
Public pension funds are even more likely to do so. Indeed, the LA Times recently reported that CalPers' renewed activism is being "fueled partly by the political ambitions of Phil Angelides, California's state treasurer and a Calpers board member, who is considering running for governor of California in 2006." In other words, Angelides is using the retirement savings of California's public employees to further his own political ends.
Such abuse of public pension funds by incumbent politicians is unfair to their political opponents, other investors, and especially the retirees who depend on those funds. Studies have consistently shown that the greater the extent to which a public pension fund is subject to direct political control, the worse its investment returns.
More than half of Americans are now stock investors. Yet, only a select self-appointed few have become activists. All too often, their activism is directed at selfish interests inconsistent with those of investors at large. It's long past time for the SEC and Congress to recognize that empowering these shareholders with expanded access to the proxy statement and the boardroom is the worst sort of special interest legislation. (Then again, maybe they already know that.)
Stephen Bainbridge is a frequent contributor. He recently wrote for TCS about the fallout of Sarbanes-Oxley.