A corporate governance committee of the board.

• Author: Thompson, Louis M., Jr.

Creating a committee focused on governance issues could result in a board more responsive to investors and more organized in its oversight role.

The U.S. Securities and Exchange Commission's shareholder communication and revised proxy rules, coupled with the new executive compensation disclosure requirements, have resulted in a significant shift in how institutional investor activists approach corporations on governance issues.

The most important governance issue today is corporate performance as it relates to share holder value, and the way the institutional activists are attempting to influence companies to improve performance is through communication and negotiation with boards of directors, including senior management. As a result of the SEC's proxy rule changes issued in 1992, the approach to corporations has begun to shift from the legal/proxy arena to the communications/negotiating arena, with the latter being the carrot and the proxy, the stick. In other words, if communication and negotiation fail, the proxy and publicity become the courts of last resort.

The California Public Employees Retirement System (CalPERS) established the model for this approach. In the 1980s and early '90s, CalPERS and other institutional activists attempted to bring about changes in corporate governance by submitting proxy proposals on such issues as eliminating staggered boards, placing board-approved "poison pills" on the proxy for shareholder vote, confidential proxy voting, and so on. Sometimes, these proposals were released to the press and arrived on editors' desks even before the companies received them, immediately putting the targeted companies on the defensive.

The climate that this approach created was often confrontational and nonproductive. In fact, rarely did these proxy proposals receive enough votes to pass. While a few companies voluntarily made changes to their corporate governance procedures, many did not. This confrontational environment was enhanced by the fact that companies that were takeover targets during the M&A era believed that the institutions had sold out to the highest bidder in these battles and were not the "loyal shareholders" they had hoped for.

In 1989, CalPERS Chief Executive Dale Hanson (who has recently resigned from that position) sent a letter to the SEC offering over 40 proposed changes to the proxy process, in an effort to allow primarily institutional investors greater opportunity to communicate among each other...