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Fairer Rules for the Governance Game

By: Robert S. Apfelberg  E-mail:

The value of shareholder activism is clear. No board of directors, no matter how well qualified, can be expected to represent shareholder interests better than shareholders themselves. Directors necessarily have a close partnership with the corporate management they select, monitor, advise, and compensate. However, shareholders can be single-minded about their interests, and have every right to be.

This article recognizes the manager's need for authority, and the difficulty of daily decisions. It acknowledges directors' ethical and (in some states) legal obligations to consider the interests of constituencies other than the shareholder. However, it focuses on shareholders' ethical and legal obligations, and legitimate rights, to receive a fair return on their investment. It suggests methods shareholders may use to encourage management to no longer take them for granted.

The new shareholder activism has begun to achieve results, but directors still rarely communicate with shareholders, who have, themselves been hesitant to organize. Both fear inadvertent violations of securities laws enacted to deal with other problems. In my opinion, shareholders' activities need to be better orchestrated, so they will be less dangerous, more effective, and more just.

Corporate managers and directors who anticipate problems, operate efficiently and plan for future contingencies, should be admired, cheered, and compensated generously. They should also be monitored carefully, but left alone. Managers who have passively presided over the deterioration of their company's competitive position and stock price, cannot expect kudos for finally commencing a reorganization and seeking "rescue" capital. However, it is only fair that such managers be given a progressive series of chances to change and improve.

Here are some practical organizational suggestions.

1. Periodic Review. Shareholders should establish a periodic schedule for reviewing the actions, and shareholder-value achievements, of each of the companies in which they've invested. Companies dealing well with economic, social, technological and customer and employees attitudinal change may be reviewed only once a year, with more questions than comments, directed at management. Others should be reviewed more often with more directed comments and critiques.

2. Positive Communications. Individual shareholders should communicate with each effective, hard-working and honest manager and independent director once each month by simply stating their appreciation. Receiving periodic "attaboy's" or "attagirl's" from shareholders can motivate continual improvement.

3. Discussions With Management. If shareholders detect continuing problems, and management's apparent inability to improve operations, they should question management and review performance more frequently. Shareholders should individually develop a prioritized list of suggested informational changes in management and in the board of directors. This definitive prioritized list should be shared with management, the board, and other shareholders, who should be encouraged to have their own frequent discussions with management.

4. Joint Action. If shareholders separately and jointly meet with management unresponsiveness and ineffectiveness, they should consider joint actions. Shareholders then should review available information about the attitudes, needs, assertiveness and outlook of the other shareholders to predict what they may be willing to do. At this time they should create a prioritized list of less severe alternatives then a lawsuit, for redressing their legitimate grievances. They also need formal procedures for the careful, but rapid, consensus approval of increasing shows of force.

5. Covering Bases. Each shareholder should then individually meet with legal counsel to determine the correct method for discussions between shareholders. The investment manager's supervisor, or trustees, should immediately be consulted to determine the possible effect of these activities on the investment fund itself. Shareholders must compare the risks of activity with the results of passivity. Managers must become aware that, currently, activism appears to be the best financial alternative for shareholders.

6. Initial Shareholder Meetings. Shareholders who opt for joint action should then carefully meet, utilizing closely structured guidelines and reporting rules. Counsel should be present at these meetings to encourage "legally correct" speech. The shareholder meeting should create a prioritized summary of the groups' requested information and proffered suggestions. A carefully worded public position statement should be created. Individual shareholders must then be discouraged from contacting management and the board with their private suggestions.

7. Board Slate. If earnings continue to decline, or management becomes defensive, a "slate" of potential board member candidates (including appropriate incumbents) should be interviewed. Present outside board members, and these candidates, should receive the shareholder group's public position statement. Shareholders should obtain candid, personal and professional comments, and references, about all board members and candidates. With their permission, shareholders should confidentially speak to persons knowledgeable about board candidates' integrity, business judgement, independence, and personal courage.

8. Counsel. Shareholders and outside directors must each seek independent counsel to ensure that their activities are legal, ethical and effective. If outside directors cannot obtain totally independent advisors at the expense of the corporation, shareholders should be prepared to supply funds for that purpose.

9. Continued Shareholder Meetings. The shareholder group should continue to meet regularly. Management will realize that shareholders are continuously monitoring them and discussing their accomplishments. The meetings should be periodic or (within a carefully pre-planned framework) ad hoc.

10. Meetings of Counsel. Counsel for both the shareholder group and the outside directors should periodically meet to carefully determine legally achievable independent contact between their clients. Significant director and shareholder contact should be made public. If absolutely necessary, shareholders must be prepared to execute "no trade" agreements for appropriate periods, to allow greater freedom to discuss highly unusual vital issues.

11. Resolving Disagreements. To be fair to both managers and directors, shareholder groups should create an established procedure to resolve the conflicting financial goals and personalities of individual shareholders, and to eliminate any public confusion over the group's future directions.

12. Last Resort-Lawsuit. As the last resort, shareholders must be prepared to respond to management or board inaction with a lawsuit. Management will test the limits of shareholder and outside director commitment to receiving results, responsiveness, and candor. Shareholders must recognize that managers sincerely believe they are the only ones who can, or should, correctly balance the interests of shareholders, employees, customers and the community.


The steps described here are incremental in nature, each one tougher than the last. Shareholders need not adhere to these steps to the letter, but they should follow them in spirit. This means that before suing managers and directors, shareholders should give them a chance to change. It also means that shareholders who grant those chances should be willing to follow up with stronger actions if management ignores them. After all, fair is fair.