Controlling Corporations

Barack Obama is not the only one who’s had a bad week. Leaders across the board and around the world were under attack. This is not new – it’s the way things now are. But every now and then some single thing happens to remind us yet again, and in no uncertain terms, that leaders in 21st century America are contending with forces that are as powerful as they are new.

In this case I’m talking about leaders in business, specifically about chief executive officers who increasingly are being blindsided by those euphemistically called “activist investors” or, if you prefer, “shareholder activists.”

In the old days, CEOs and their largely handpicked boards were left largely alone to run their businesses as they saw fit. This held true even when times were tough, when the business was performing poorly. And it held true even if management was doing badly, if individual executives including those at the top were not up to the task. In other words, other than government, there has been no outside force, no entity organized enough and forceful enough, to challenge those on the highest rungs of the corporate ladder.

Among other reasons, unlike voters, who are relatively easy to organize, shareholders in large numbers are not. Even those among us who hold stocks do not typically pay much if any attention to how the companies that we own in part are run. We don’t understand the business. We don’t know who else is a shareholder. We are far flung and have zero sense of community. And we have no conception that our vote on any given individual or issue will make a difference.

This is not to say that the average shareholder has no voice at all. In fact on line technologies are slowly being employed to, for example, connect with and rally other shareholders, get people to participate in annual meetings, coordinate proxy votes, and complain loudly if not necessarily effectively about company policies, including executive compensation. Still, so far this approach has been scatter-shot, effective only infrequently – which explains why leaders in the private sector are still relatively free to lead as they see fit. (That is, leaders in the private sector are free to lead as they see fit – relative to leaders in the public sector.)

But when the Wall Street Journal’s main front page headline screams “Activist Storms Microsoft Board”, as it did just a few days ago, you can reasonably conclude that something’s afoot (August 31/September 1). Just a few days earlier Microsoft’s CEO, Steve Ballmer, had announced that he was stepping down. And now this! Now Microsoft was being obliged effectively to put on its board (late this year or early next) a hedge fund investor claiming to represent many other investors, all of whom were unhappy with the company’s recent performance. We need not lose sleep over Microsoft – it’s sitting on a pile of money and its business is healthy enough. But its stock price has languished, it has not been considered especially innovative, and now there is the new question of management succession.

The story of the assault on Microsoft’s management would not be so big if it were not indicative of a larger trend – but it is. Increasingly activists with huge war chests are taking on companies large and small – including blue-chip companies such as Procter & Gamble and Pepsico – which is why we can say the playing field has changed. Again, leaders, here CEOs, are getting weaker and followers, here shareholder activists with deep pockets and plenty of moxie, but no formal authority, are getting stronger.

As a result of the threats by outsiders, CEOs are being forced to play defense. They are taking activist investors more seriously. They are monitoring their shares for signs of an activist threat. They are hiring advisers when insurgent investors emerge. And, as the New York Times notes, they are willing to compromise, for example to offer a board seat or two, to try to avoid a bloody battle for control. As one hedge fund manager put it, “Companies are trying to engage with the activists early, below the radar, so that things don’t have to bubble up to the surface and become public, which is extremely disruptive to the company.” (New York Times, August 31.)

Another example of the end of leadership – at least as we have known it.

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