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
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
"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
"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. …