How the “Shareholder Spring” is rocking many a board

“The corporate world is emerging from several weeks of boardroom turbulence dubbed the “Shareholder Spring.” In annual meeting after annual meeting around the world, boards have been taken to task by investors and other stakeholders on a wide range of issues: remuneration, board composition, competence, diversity, voting control, dual stock, and more. In the meantime, we have also witnessed the soap opera of Yahoo’s boardroom, the rebuke to newly public Groupon’s board for its lack of oversight of accounting practices, and the public condemnation of News International’s chair – and, by extension, its board – questioning his competence to lead the organization. No sector has been immune; no director has been untouchable.”

LUCY P. MARCUS Reuters.com (May 17, 2012)

Lucy Marcus is always worth paying attention to on the subject of boards. Last week she highlighted a recent phenomenon: the so-called “Shareholder Spring.”

As the excerpt shows, like the “Arab Spring” before it, which rolled across the Middle East toppling dictators, the Shareholder Spring is rippling across boardrooms and annual general meetings. Shareholders may not be rioting or amassing, but they do seem to mean business: they are overturning too-generous pay awards made to themselves by executives; they are questioning the quality of the people who sit on their boards; and taking aim at power structures that allow them a limited voice in decision-making.

What took them so long?

Shareholders are, of course, the legal owners of the business. Board directors are their agents, and chief executives their employees. But looking at the public enterprise in recent years, you would be hard-put to make that conclusion just by observation.

What we’ve seen for too long are shareholders relegated to the sidelines: receiving just enough information to fathom what is going on in their companies; attending stage-managed meetings like children on a family outing; and generally being asked to approve what the “grown-ups” decide for them.

That’s all very well when the grown-ups know what they’re doing and the children don’t, but the jury is out on that one. We have to wonder when chief executives preside over monumental risk-taking (JPMorgan Chase); when they award themselves eye-watering compensation while depleting shareholder value (pretty much every American bank); when board members engage in unending fights and bitter recriminations (HP out there; CMC Motors in Kenya). Then, shareholders have to ask whether they should just look away and hope for the best.

The list is long: Barclays, Aviva, Trinity Mirror, Pendragon, News Corporation, AstraZeneca, Citibank, Yahoo and others have taken unprecedented heat from shareholders this year, resulting in major reversals and revocations.

“To me it’s capitalism renewing itself,” Simon Walker, of the UK Institute of Directors, was reported saying in The Guardian. “Those of us who believe in free markets ought to be shouting from the rooftops.”

Indeed so. Elite groups of principal shareholders allied with executive teams have had too much say for too long. They have been very willing to go to market for additional funding; but very unwilling to give new minority shareholders any meaningful sway in the business.

Don’t get me wrong here: a corporation that runs by referendum of the shareholders would be paralyzed. And it is a fact of life that power will always lie with those who have more shares than others. Further, in countries such as ours with immature and often ignorant shareholders, too much shareholder power given too early may not be something to pray for.

Nevertheless, the Shareholder Spring is a useful corrective against those who sit on “tone-deaf boards in sound-proof rooms” (an excellent Lucy Marcus phrase, this time from Harvard Business Review). As power swings unpredictably between managers, directors and shareholders, a new equilibrium must be found.

Whatever happens next, wise boards should start planning ahead. The days of aloof crony boards that only serve narrow interests may be numbered.

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