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A Shareholder's Guide to Corporate Governance Activities

By Robert S. Apfelberg  E-mail:

Corporate managers who anticipate problems, operate efficiently, and plan for future contingencies should be admired, cheered, compensated generously, and monitored lightly. Corporate managers who have quietly presided over the deterioration of their company's competitive position, morale, reputation, and stock price cannot expect instant financial and emotional kudos for commencing a reorganization and seeking "rescue" capital. Recently, removing CEO's, who failed to manage the practical and public relations effects of change, has resulted in short-term dramatic increases in share prices.

Directors are reluctant to communicate independently with shareholders. Concerned owners/shareholders are disinclined to organize and advocate their interests. Both are inhibited by the fear of technical and inadvertent securities law violations, that were created in a different era to remedy other problems.

Previously, shareholders, and those board members that cared about Shareholder-Value, became less effective and more unpopular with management. Shareholder supportive directors became corporate "dissidents" and discovered how financially, intellectually, interpersonally, and emotionally difficult it was to remain on boards intended to be modern, responsive and courageous.

This article will be presented as a practical organizational manual. It combines both this author's personal experiences as a Shareholder-Value, "dissident" director and the suggestions of several institutional investors and securities counsel regarding what may be attainable:

1. Shareholders should establish appropriate periodic schedules for reviewing the actions and Shareholder-Value achievements of each of the companies in which they've invested.

2. Shareholders, observing a company's continuing operational difficulties, may inform other shareholders of their concerns, and encourage them to independently have discussions with management. Managers must recognize that it becomes vitally important to be responsive and candid, as more shareholders, and analysts, develop consistent, critical and cautious perceptions of them.

3. If management continues to be unresponsive, and corporate problems continue, shareholders should frequently review performance and question management. Concerned shareholders should independently develop a prioritized list of suggested informational, board of director and management changes they deem advisable. This definitive prioritized list should be shared with management, the board and other shareholders.

4. Shareholders required to consider joint actions should individually discuss with their legal counsel the correct method for discussions between shareholders. Counsel can also suggest procedures for safely organizing discussions among shareholders, directors, and management. The investment manager's supervisor, or trustees, should immediately be consulted to determine the possible effect of a series of probable actions on the investment fund itself. An evaluation of the expected response of other shareholders must be performed, before cooperative actions may even be considered.

5. Investment managers, and other shareholders, should then carefully meet utilizing tightly controlled guidelines and reporting rules. Cautious, but result-oriented and assertive, counsel should be present at all meetings to encourage only "legally-correct" speech. The shareholder meeting should create a prioritized summary of the groups' requested information and proffered suggestions. A public position statement should be carefully worded. Shareholders must then be discouraged from individually contacting management and the board.

6. If earnings continue to decline, or management becomes defensive, board member candidates should be interviewed regarding their attitudes about the shareholder group's public position statement. Shareholders should obtain candid personal and professional comments about all board members and candidates, with their permission, by confidentially speaking to persons intimately knowledgeable about their integrity, business judgement, independence, and personal courage.

7. Securities law advice regarding the method and consequences of encouraging other shareholders to vote for the Shareholder-Value director "slate" should be obtained. Individual shareholders may become responsible for reminding other shareholders to vote.

8. Independent, Shareholder-Value, outside directors must have independent counsel, accountants, and financial and investment consultants. This ensures that: (i) their activities are legal, ethical, and effective, and (ii) acknowledges recent litigation, including Paramount Communications, Inc. vs. Q.V.C. Network, Inc., that hold that "outside" directors have different financial and legal interests than management and "inside" directors.

Some outside boards have successfully engaged independent professional advisors at the expense of the corporation. Particularly control-oriented CEO's have only allowed outside board members their own counsel and advisors, if the CEO is included in the board members represented and present at all meetings. Pragmatically, this negates the effectiveness and purpose of these separate discussions.

9. If outside directors cannot obtain totally independent advisors at the expense of the corporation, shareholders should be prepared to supply funds for that purpose. Independent advisors are the primary way to ensure that management is not able to threaten outside directors with potentially embarrassing public disclosure, or investigations, of legitimate, but untraditional and management unpopular, contacts and activities.

10. The shareholder group should continue to meet regularly. Management will realize that shareholders are continuously observing and discussing them. If periodic meetings cannot occur, then plans for well-structured, organized, and rapidly-called ad-hoc meetings must be created and utilized.

11. Counsel, for both the shareholder group and the outside directors, should meet periodically. They must continuously and carefully structure the independent contact between their clients.

12. 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 discussions of unusual and vital issues.

13. Shareholder groups should create an established procedure to ameliorate: (i) the conflicting financial goals and personalities of individual shareholders, and (ii) public and private confusion over the group's future directions, resulting from different shareholders making public statements, or leading discussions.

14. Shareholder groups, and their counsel, should also create: (i) a prioritized list of other less severe and dangerous methods, than a lawsuit, for redressing their legitimate grievances, and (ii) formal procedures for the careful, but rapid, consensus approval of increasing shows of force.

15. The recent increase in public statements and voting abstentions has made incumbent directors and officers more cautious. However, management will test the limits of shareholder's, and independent board's, 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. As the last resort, shareholders must be prepared to respond to management or board inaction with a lawsuit.

16. Directors, and managers, should be held personally accountable for their: (i) ethics, (ii) business judgement, (iii) independence, and (iv) sincere commitment to Shareholder-Value. Failure to accomplish effective change, under exigent circumstances, because of a deficiency in any of those areas, is reason for their replacement. However, they deserve current, and future, shareholder's support if they have exercised good independent judgement, legally and ethically, and are philosophically loyal to their stated objectives and Shareholder-Value.

17. Individual shareholders should call, or write, to each independent director once each month. This brief, nonspecific communication should simply state that shareholders are appreciative of the director's commitment, work and courage. This author intimately knows that being legally, ethically, and philosophically committed to Shareholder-Value, in the face of management's disapproval and power, is difficult, frustrating and demanding. Receiving periodic "attaboy's or attagirl's" is the most influential reason for continuing. Being part of the increased recognition of the shareholder's/owner's legitimate, vital needs and power, is another reason. The direction and intensity of this wave of change, and management's ability to successfully "surf" will depend upon manager's modernity, skills, candor, and responsiveness.

This author understands that the suggestions made in this article are controversial. They have to be carefully researched and orchestrated. They will be met with management's private and public objections and heartfelt disagreement. Similar to other progressive ideas, recognition of their necessity, value, and effectiveness may not soon, or ever, occur. However, if the reader deems helpful any, or all, of these organizational methods, they should be discussed and tried. However, owners/shareholders unwilling to ever utilize the strongest methods, under any circumstances, must be cautious about beginning even the gentlest actions.