When Institutional Investor published a report on proxy reform in its April 1991 issue, corporate governance was on the precipice of change. The California Public Employees’ Retirement System and College Retirement Equities Fund were lobbying the Securities and Exchange Commission to give institutions a say in corporate governance, as Stephen Clark reported in “Push Comes to Shove on Proxy Reform.”
The raft of changes proposed in 1991, and enacted in October 1992, radically shook up marketplace power dynamics. The revisions included provisions to give institutional investors a louder voice in the companies they partially owned, by allowing these shareholders to collaborate on proxy measures. “Corporate managers fear that granting institutional investors a greater role in the proxy process could create a potential for shareholder collusion, allowing, perhaps, a plot to oust particular directors,” Clark wrote in the 1991 piece. How right he was.
Proxy voting — an individual voting on behalf of a shareholder or a corporation — had by then been around for more than a century. The SEC wrote a comprehensive set of rules in the 1930s, which it overhauled in 1956, and was sorely outdated by the late 1980s. “People were reluctant to talk about individual issuers before 1992,” says Patrick McGurn, special counsel at Institutional Shareholder Services, one of two major U.S. proxy firms, along with Glass Lewis.
“It was awkward for institutional investors to talk with one another about specific companies.” They could make roundabout attempts to share notes, but direct discussions were prohibited without prior approval from the SEC. That all changed in 1992. The revamped proxy-voting process also gave investors extra transparency into executive compensation and streamlined board nominations.
Nowadays, some believe the scales have tipped too far in shareholders’ favor, empowering activist investors with relatively small stakes to radically change the makeup of executive boards. CalPERS and CREF fought for investors’ rights; Bill Ackman and Carl Icahn flexed them.
“Current regulations governing the way shareholders access a company’s proxy statement can poison the company–shareholder relationship by amplifying the voice of a tiny minority over the best interests of the vast majority,” NASDAQ stated in a June report. But as McGurn sees it, “the cumulative effect of all of those changes — it doesn’t tip the scales as much as it’s leveled the playing field.”
