2.4 Shareholder activism
Shareholder (investor) activism can also force better corporate governance. Historically, individual shareholders, whether institutions or private persons, have had little chance of influencing the board or management given the fragmentation of ownership.
Shareholders can ask questions at the annual general meeting, but they would need a majority of votes in order to pass a motion that was binding on management. Even institutional shareholders do not, in most countries, hold as much as 5 per cent of the ordinary shares of one company. However, it should be noted that in Germany there are cases, such as Daimler and Volkswagen, where single institutions hold much larger proportions. In fact, the majority of shares in multinationals in Europe are held by financial institutions rather than private individuals. In the past such investors have preferred to sell their shares when they disagree with company policy, rather than intervene in the management of the company. However, attitudes have changed over time. Institutional investors have become more aggressive, and individual investors have formed associations that enable them to work together and command more votes in investee companies.
The California Public Employees' Retirement System (CalPERS) is the biggest pension fund in the United States, with $160 billion under management. It started its corporate governance reform programme as early as 1984. It has a website, and its annual Focus List is a hit list of companies that need, in the view of the fund, to improve their performance. CalPERS has a general strategy of public ‘naming and shaming’ to force change where it is tardy. It is one of the few funds to make its proxy votes public, publishing them on its website in advance of company annual meetings. There is a growing demand that institutional investors disclose how they vote. In 2003, CalPERS demanded the resignation of the chief executive of the New York Stock Exchange, and he was ultimately obliged to resign. CalPERS' trustees (its 13-member board of administration) in 2003 approved proxy voting guidelines that included voting against any director who approved non-audit work by the company's auditors. This resulted in CalPERS voting against all of the directors in the roughly 1800 companies in which it owned shares (Brewster, 2004).
In the UK, the National Association of Pension Funds (NAPF) is an organisation that represents the interests of employer-sponsored pension funds. Its members have investments of more than £600 billion. It has become increasingly active, and publishes position papers and advice to institutional shareholders as to what standards they should expect from multinational companies in which they invest. Some pension funds ask the board of directors of a company in which they are planning to invest to sign a document that sets out minimum governance undertakings. Recently, NAPF joined forces with the Institutional Shareholder Services to reinforce its lobbying for shareholders’ rights.
The International Corporate Governance Network (ICGN) is an example of a worldwide multi-stakeholder coalition within the investment community. It was founded in 1995. Its members are institutional investors such as major pension funds like CalPERS, investment clubs and insurers, as well as leading corporate governance and shareholder value professionals, and corporate officials. ICGN members are estimated to hold assets exceeding $10 trillion. The ICGN originates from the corporate governance endeavours of CalPERs, the College Retirement Equities Fund (TIAA-CREF), the Council of Institutional Investors in the USA, the Association of British Insurers, the Cadbury and Hampel Committees on Corporate Governance, NAPF and the Corporate Governance Forum of the Centre for European Policy Studies in Belgium.
ICGN seeks to develop a global consensus on capital market corporate governance and, above all, to lay down best practice for both issuers and investors. It promotes best practice through its studies, toolkits, annual meetings and awards programme. In 2002 it undertook a study on cross-border voting practices and found that ‘Global standards of corporate governance have gained widespread acceptance in recent years, but the mechanics of governance have not kept pace’ (ICGN, 2002). Share voting is a primary governance mechanism, and this study reveals that accountability is far from assured. ICGN is campaigning for the one share, one vote principle.