By Jeffrey R. McCord of The Investor Advocate
SHAREOWNERS OF THE WORLD UNITE!
“Occupy” Annual Meetings and Court Rooms
The spectacular fall and bankruptcy of Jon Corzine’s MF Global Holdings within clear sight of mostly inactive regulators reminds us that “the system is still far too vulnerable and the work of regulatory reform far from finished,” to quote a NEW YORK TIMES editorial on the subject . But, how to continue regulatory reform in a world in which one House of Congress is controlled by anti-regulatory zealots and existing regulators are too often afflicted by chronic DC/NY revolving door syndrome?
In frustration, President Obama has finally begun using Executive Orders to try to accomplish more positive economic change. And, as we all know, he was preceded and prodded by the growing ranks of the Occupy Wall Street movement spreading nationwide and into Europe.
As their visibility and perceived importance of OWS increase, more arm chair generals (me included) are putting forth a lengthening agenda of reforms we hope protestors will demand. One percipient OWS observer hit a big nail on the head when he identified the following economic pressure point progressives should slam:
“If I had to give the Occupy Wall Street movement a piece of advice, I would tell them to focus their growing chorus against Wall Street excesses on corporate governance reform. . . . [That] may sound innocuous, or tedious, or overly academic, but if this movement wants to put the fear of God into the corporate chieftains who are looking down from their towers in Manhattan at the masses below, needs to take the time to explain to its foot soldiers exactly how power is wielded in a modern corporation.”
That suggestion from Kris Broughton, an independent journalist, blogger and national media commentator who also uses the moniker “brown man thinking.” (See http://bigthink.com/ideas/40697 ) And, his African-American heritage may have informed his choice of this agenda item usually overlooked by progressives. But, it was activism by individual and institutional investors (in the form of company annual meeting ballot initiatives and shareholder voting and litigation) that helped end the abomination of legal racial oppression and separation of races in South Africa, and achieve expansion of civil rights at home.
Shareholder Activists Help Defeat Apartheid .
One of the first effective blows against apartheid in South Africa by the international community was wielded by the Episcopal Church in 1971. As a shareholder in General Motors Corporation, then a profitable corporate behemoth standing astride the world, instead of ignoring the voting rights its share ownership bestow, the Church:
“introduced a shareholder proposal . . . requesting that General Motors cease operations in South Africa, a nation then enforcing a very strict apartheid, including total separation by race in the workplace (jobs, pay, drinking fountains, etc). The registrant’s [General Motors’ subsequent] proxy statement [mailed to all shareowners] revealed that one of GM’s directors, the Rev. Leon Sullivan, had voted against the Board’s decision to oppose the [South African] shareholder proposal. At the annual meeting, Rev. Sullivan came down from the dais and spoke in favor of the shareholder proposal. The upshot of the ‘conflict’ on GM’s Board was the creation, by a coalition led by General Motors, but consisting of almost all of the major U.S. corporations operating in South Africa, of the ‘Sullivan Principles,’ a code of conduct to abolish apartheid in their South African workplaces.”(See more at: www.iccr.org , the Interfaith Center on Corporate Responsibility.)
That radical and successful non-violent action initiated by a mainstream Christian denomination ultimately led faith-based organizations from virtually all major religions within the United States to form The Interfaith Center on Corporate Responsibility (ICCR). Today, it is comprised of 275 members and affiliates — including faith-based institutional investors such as pension funds, foundations, hospital corporations, economic development funds, asset management companies and colleges — that have investment portfolios collectively valued at more than $100 billion. They own shares in most major corporations and actively use the governing rights those shares convey to promote honest and socially responsible management of companies in which they invest. ICCR board member Jeffrey Dekro of Jewish Funds for Justice, for instance, is a catalyst for investment in low-income community development.
Fighting Capitalist “Heresies” With Capital
Back in 2002, when most investors and citizens were still angry from the last round of egregious corporate fraud and abuse (think Enron, Global Crossing, WorldCom, Adelphia Communications, etc), the NEW YORK TIMES reported on the interfaith group’s shareholder activism by focusing on ICCR executive Sister Patricia Daly, a member of the Catholic Dominican order:
“Sister Daly views her work as following in the tradition of the Dominican order, founded in the 13th century by St. Dominic to fight heresies and untruths. ‘We’re dealing with some of the heresies and untruths of capitalism,’ Sister Daly said.”
Risk Metrics Group, a profit-making associate member of Sister Daly’s ICCR, provides research and advice to governments, corporations, academics, institutional investors and others seeking unbiased actionable information on securities markets and companies that issue securities. Although recently acquired by a larger consulting firm (Institutional Investor Services, Inc.), Risk Metrics remains a leader in providing clients with decision-making data on corporate governance matters. And, the number of institutional investors willing and interested in fostering corporate management reform has expanded far beyond the ranks of the faith-based.
“Short-term Profit Maximization is not a Sustainable Model”
In an interview, Lucas Green, an attorney and a research director for Institutional Investor Services Inc.’s corporate governance unit, said socially aware shareholders can and should exert a positive influence on how corporations are governed. Today, institutions – particularly pension funds serving employees, academic personnel and union members – are using more than proxy ballots to force change at poorly and dishonestly governed companies. They are going to Federal court, where, like civil rights activists and environmentalists before them, they use class actions to unite all shareholders in tackling a corporation’s embedded executives.
Admittedly, the prospect of strategic corporate proxy battles, institutional investor led litigation, and such key “corporate governance” issues as management compensation packages are enough to make the eyes of many OWS protestors (and most other citizens) glaze over. But, the ISS’s Lucas Green explains how the interests of Main Street are aligned with some of the nation’s largest public and union pension funds pushing for real change:
“One only has to look back to the Enron, WorldCom and more recent scandals to see the relevance of how corporations are governed to the interests of all investors including individuals and the overall health of our economy. Experience demonstrates that a corporate structure that places the highest value on short term profit maximization and short term stock price gain is not a sustainable model. Executive compensation packages should encourage long-term, sustainable growth and health.
“The interests of public pension funds, which are often among the largest investors in any given corporation and which seek effective, honest corporate governance focusing on the long term, are aligned with the public interest in several ways. The beneficiaries of pension funds themselves are typically individual employees and, more broadly, the funds in their role as big investors can also exert a positive influence on securities markets and the economy.”
Adjusting United Healthcare’s Moral Compass
As an example, in his lengthy paper on litigation in corporate governance, Mr. Green cites a lawsuit led by the California Public Employee’s Retirement System (CALPERS), a huge pension fund with about $236 billion in assets under management, that helped force extensive reform in the way the giant healthcare insurer United Healthcare Group, Inc. is managed. (See Green’s study at http://blog.issgovernance.com/slw/author/luke-green-1/ )
A few years ago, amid a federal investigation (in 2006) into the illegal back-dating of stock options to enrich senior United Health managers, a separate New York State Investigation (in 2008) of alleged fraud in consumer healthcare billing, and other allegations of fraud in the sale of its securities to investors, CALPERS and other investors successfully pursued a class action against United Health in federal court that in 2009 won the following:
— $925.5 million for allegedly defrauded shareholders;
— creation of a more independent board of directors to exercise better oversight of United Health management;
— reform of United Health executive compensation packages to discourage future wrongdoing.
Pension Funds Can Do Better Than SEC at Thwarting Wrongdoing
Ample research in recent years demonstrates that class action lawsuits led by such powerful investors as CALPERS can achieve better results at holding wrongdoers financially accountable and in deterring future misbehavior than even the Securities and Exchange Commission (SEC). For nearly a decade, two law professors, James Cox of Duke University, and Randall Thomas of Vanderbilt, have studied the role of institutional investor-led lawsuits in combating fraud and other corporate abuse. In a joint paper published last year, they concluded:
“[P]rivate suits headed by an institutional lead plaintiff . . . appear to [target bigger corporate wrongdoers and achieve] better settlements and lower attorneys’ fees awards
[than lawsuits led by individual investors]. SEC enforcement efforts, while significant, have tended to focus on weaker [and smaller corporate malefactors as] targets, suggesting that the big fish get away.”
What Can Peasants Do When Pitchforks are Parried by Police?
What can individual citizens – including our OCW surrogates serving at the front — do to reform corporate governance? The fortunate few who are still covered by pension funds
should contact their funds’ managers and encourage them to join the fight for reform. Citizens who are active in Christian, Jewish, Muslim and other faith-based organizations should ask their religious leaders to mobilize congregate financial resources and inherent strength in numbers of individuals to challenge corporate crime in both shareholder meetings and courts.
# # #