Who's Running the Company? Spurred by Challenges to Corporate Competitiveness in World Markets, Institutional Investors, outside Directors, and Employees Themselves Are Trying to Gain More Influence in Corporate Governance. Large Pension Funds Grow More Assertive

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PENSION funds, mutual funds, and other institutional investors own more than half of the publicly traded stock in America.

Now they are exerting more of that power. This spring, for example, the California Public Employee Retirement System (CalPERS), put its weight behind four shareholder proposals designed to make Sears Roebuck & Co. more responsive to investors.

None of the proposals won a majority of votes cast, but they came close enough to rattle Sears, whose core retailing business has failed to live up to investor expectations. A measure that would require future proxy votes to be conducted through a secret ballot received 41 percent of the vote, yet the company agreed voluntarily to change its policy. Other proposals would have required that the entire board of directors stand for election each year, instead of every third year, and that the chief executive officer not be board chairman.

Shareholder activism is getting the attention of corporate America, albeit company by company.

Where the 1980s was the decade of hostile takeovers, "the '90s will be the era of the proxy fight," says Donald Frey, a Northwestern University professor.

The question of how far this trend should be carried is being debated by policymakers, investors, and academics.

A longstanding theory in the United States holds that shareholders are "passive" investors, too numerous to have meaningful input on corporate strategy.

In this environment, boards of directors - elected by shareholders but with strong representation from inside the company - serve as middlemen between owners and managers.

Many of the recent shareholder proposals are intended to make boards more accountable to shareholders and less to corporate executives. Others focus on encouraging both directors and executives to act more like owners by tying their pay to company performance.

But even as shareholder activism is catching on, some observers say it does not go far enough.

Michael Porter of the Harvard Business School argues that policymakers should encourage institutional investors to play a role more akin to that of the big banks in Germany or Japan. These banks have regular meetings with managers and support investments by the company to stay competitive over the long term. Thus, although the banks do not own a majority of stock in the companies they finance, the share is large enough to make the banks act as permanent owners.

"The US system may come closer to optimizing short-term private returns. The Japanese and German systems, however, appear to come closer to optimizing long-term private and social returns," Mr. Porter writes in "Capital Choices," a study published in June by the nonprofit Council on Competitiveness.

Porter does not suggest that the US could or should adopt Japanese or German approaches outright. Those systems have flaws of their own, he notes. But Porter and others suggest that the US change laws that encourage big funds to be "outsiders" rather than "insiders."

"All the rules are against them investing enough ... to actually know anything" about the inner workings of a company, "which is absurd," says William Sahlman, another Harvard professor.

Banks, with $3 trillion in assets, have long been barred from holding stock. …