Photograph by FPG/Hulton Archive/Getty Images

Shareholder activism can lull us into a false sense of security and make us forget that there are bigger corporate governance fish to fry.

By Eleanor Bloxham
February 18, 2015

The annual corporate shareholder-voting season is primarily a rite of spring. Although Apple, Disney, Deere, and Hewlett-Packard have already produced their voting materials, over 70% of Fortune 100 public companies that file these documents with the SEC send out their ballot notifications in March or April.

Although most votes by shareholders are not binding, the vociferous hyperbole around shareholder activism relies on war and sports analogies—lots of “them” and “us”—which sells newspapers and belies the very notion of “investor relations.”

But does this springtime ritual have any substance, as it does in the animal kingdom when males (or females, depending on the species) put on displays of strength, mark their territory, and secure dominance over their resources? And does the process really reform wayward companies and improve public trust in business and capitalism?

Robert A.G. Monks, co-author of the book Corporate Valuation and founder of Lens Governance Advisors, told me that there is a mythology around corporate governance and that the right questions don’t seem to be addressed amid the spectacle of proxy season. Consider the issues around corporate domicile or the responsibility of firms for the costs they impose on society, he says.

Monks points to a paper published last year by NYU law professor Marcel Kahan and University of Pennsylvania law professor Edward B. Rock entitled “Symbolic Corporate Governance Politics.” The paper argues that, “activists and managerialists wage battles over issues of little import, while ignoring more meaningful issues.” One example they cite of a minor issue that gets too much attention: the move to majority voting on a single slate of director nominees. True, majority voting doesn’t offer shareholders an alternate slate of candidates to vote on, but if a nominee does not receive approval from a majority of shareholders, that sends clear notice to the board that they need to nominate another director.

Nearly a decade ago, when large companies began to adopt majority voting, John Biggs, who sat on the boards of Boeing and J.P. Morgan, told me:

“I think for American companies to have the franchise and the support of the American people, it’s very important that there is confidence in the corporate governance practice; the fairness, the responsiveness of boards to the problems of the companies, the legitimacy of the board, the way boards are elected. That’s why I think, for instance, efforts to make the election process more open and seemingly democratic, I’m not quite sure those changes will make much difference in the quality of boards, but I think they will seem much more fair to the public.”

We can argue about how big a difference majority voting makes, but it does provide a signal that boards can act on and, if they are responsive, can help stabilize the system by persuading the public that the system is fair.

In the U.S., while majority-vote trends have moved in one direction (toward a greater sense of shareholder participation), the trends at companies like Google, which don’t provide equal voting rights to all shareholders, have moved in the opposite way.

John C. Whitehead, former co-chair of Goldman Sachs and Deputy Secretary of State who died on February 7, felt strongly about shareholder voting rights. In a conversation edited for the Corporate Governance Alliance Digest in 2012, he told me:

“I am a strong believer in one share one vote. It’s a psychologically important part of the free enterprise system. If you take away the vote from shareholders, they no longer have a fair way to throw out management. It is an important [check and balance on the system]…. Once you go public and have the advantage of public capital, you have a responsibility for sharing the control with your new stockholders.”

The voting process provides psychological comfort to shareholders and the public. And, Kahan and Rock write, “Because we ritually affirm the principle of shareholder control—maintained by the symbolic, and largely harmless, disputes [that come up for shareholder vote]—the current system of corporate governance enjoys widespread support.”

Voting does more than simply prop up the system. On the margins, the votes highlight issues boards should consider, and practices at companies do change—but the change is incremental and very slow.

Kahan and Rock argue that these very small changes actually help maintain the status quo and that shareholder participation supports managerial control. “Shareholder activism, rather than undermining the legitimacy of the current system, serves a legitimating function showing that reform for the better is possible and that shareholders have power,” the authors write, whether or not shareholders exercise that power. (Think about how all CEOs of large U.S. financial institutions won shareholder approval for their pay packages following the government bailouts.)

And because of this, the performance art of shareholders making proposals—and boards making “no” vote recommendations—has a dark side because the dance “may dull the public’s desire for more transformative changes,” the authors write.

What issues are not addressed? Here are a few examples.

Are corporations, with their current legal shields, the best way for society to organize commerce?

In economist Dean Baker’s The End of Loser Liberalism: Making Markets Progressive, he writes, “The modern limited liability corporation is another example of interference with a pure free market.” Individuals harmed by corporate behavior such as polluted drinking water “are entitled to whatever assets are held by the corporation, but they cannot take the personal assets of the top managers or the shareholders.” Should managers, boards and shareholders have full liability? And, if not, what mechanisms need to be in place to ensure managers, boards and shareholders act in the best interests of society?

Do companies’ capital allocation decisions create fair and sustainable value for all stakeholders?

Stakeholders include customers, employees, shareholders, creditors, managers, suppliers, the board, government and the public.

Are the actions of pension funds, mutual funds, hedge funds, etc. properly aligned?

Since these institutions act on behalf of shareholders, should they be liable for corporate actions? If not, what mechanisms need to be in place to ensure pension funds, mutual funds, and hedge funds are acting in society’s best interests?

Of course, these questions are difficult and we’d rather avoid them. But ultimately, the man behind the curtain will be unmasked. Trust in business is weak. According to Kahan and Rock’s paper, Thurman Arnold, founder of law firm Arnold & Porter, recognized that while we may idealize entrepreneurism, our reality includes concentrated power in large corporations that operate like dictatorships. Kahan and Rock urge, “as essential as myths may be, we must guard against allowing them to confuse us in analyzing real world problems.”

Eleanor Bloxham is CEO of The Value Alliance and Corporate Governance Alliance (http://www.thevaluealliance.com), an independent board education and advisory firm she founded in 1999. She has been a regular contributor to Fortune since April 2010 and is the author of two books on corporate governance and valuation.

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