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Subject: Building Bridges to Boardrooms; Executives, Shareholders Allying at Many
Date: Tue, 3 Nov 92 04:45:22 EST
Message-ID: <2.1992Nov3.044522@AmeriCast.com>

Building Bridges to Boardrooms; Executives, Shareholders Allying
at Many Firms<By Kathleen Day<Washington Post Staff Writer=

 Conventional corporate wisdom, 1980s: Shareholders are the
enemy.

 Conventional corporate wisdom, 1990s: The enemy is your friend.

The notion that shareholders can help U.S.  executives focus on
long-term performance by becoming allies rather than adversaries
is beginning to take hold in boardrooms around the country.

 In fact, academics, consultants and other experts on how com-
panies are governed say that accepting that idea, until recently
unthinkable to most top executives, is essential for any corpora-
tion that wants to attract investors and compete in the global
economy.

 American executives long have been criticized for focusing on
short-term results to enhance their stock price at the expense of
long-term performance. The executives counter that they have been
forced to take that focus by mutual funds, pension funds and oth-
er large, institutional shareholders that care only about immedi-
ate gains.

 Times are changing. The new vogue is "relationship investing,"
where activist shareholders and management form an alliance.

 Under this approach, representatives of large shareholder groups
would sit down on a regular basis with the board of directors and
discuss a company's long-term plan to gain market share and pro-
fits. Armed with greater information and a say in the process,
shareholders in theory would be more likely to work with manage-
ment and invest for the long term instead of selling stock at
every dip in company performance or mounting hostile proxy fights
at annual meetings to oust boards of directors.

 Shareholders, especially large institutional ones such as pen-
sion and mutual funds, which now own more than 50 percent of out-
standing stock, have gained in clout in the past decade and now
are taking a more active role in overseeing the boards of direc-
tors who represent them. They are pressuring boards, in turn, to
be more aggressive in their oversight of those who manage com-
panies. In return, they promise to be less fickle, less likely to
sell their stock every time profits dip.

The forced resignation yesterday of Robert C. Stempel as chairman
of General Motors Corp. was the biggest trophy yet for those who
argue that boards have allowed entrenched management to stay in
place at troubled companies. And momentum continues to build.
Directors at Westinghouse Electric Corp., International Business
Machines Corp. and Sears, Roebuck and Co. have been feeling the
heat.

 Relationship investing is a concept propounded in several recent
studies, including one directed by Harvard Business School pro-
fessor Michael E. Porter and released last summer, and another
released two weeks ago by Oxford Analytica, an international con-
sulting firm headquartered in Oxford, England. And it was the hot
topic du jour at a conference in Washington last week of cor-
porate executives, pension fund representatives and academics.

Stanford University Law professor Joseph A. Grundfest, a former
member of the Securities and Exchange Commission, soon will
release a study showing that, as many have suspected, an active
board of directors boosts stock value. At the troubled companies
he looked at, shareholders gained billions of dollars when boards
once perceived to be passive took action, Grundfest said.

  The California Public Employees' Retirement System (Calpers),
the nation's largest public pension fund and a pioneer of share-
holder activism, might reduce the number of companies it invests
in to several hundred from more than 1,300, said Calpers General
Counsel Richard H. Koppes. The goal is to create a portfolio
small enough that Calpers officials can get to know each company
so they can become knowledgeable allies with management.

 Even Austin P. Sullivan Jr., a spokesman for General Mills Inc.,
a company whose chairman and chief executive has crusaded against
stockholder activism, has been embracing the notion of sharing
information with the former enemy.

 "It's foolish not to talk to investors," he told a meeting of
public relations executives Wednesday. "If you build credibility
over time," he said, institutional shareholders will "stick with
you," even in downturns.

 In the past, Sullivan has argued that large institutional inves-
tors are short-term owners interested only in a company's immedi-
ate horizon, not its long-term health. But shareholder activists
have long disputed that view.

 "In fact, our members hold their stock for a longer period of
time on average (seven years) than the average CEO stays in of-
fice," said Anne Hansen, deputy director of the Council of Insti-
tutional Investors. The council represents 70 of the largest U.S.
pension funds, which control more than $400 billion in investment
money.

 Large shareholders support relationship investing because it's
in their interest.  Historically, these institutions sold their
stock and bought into other companies if they didn't approve of
the way management performed.

 But now their holdings are so extensive that they have little
maneuvering room in the stock market. When big investors control
more than 50 percent of the market, selling stock in itself
depresses prices. As a result, many money managers believe that
staying with a company and forcing it to improve performance is
the better way to build wealth for those whose money they are in-
vesting.  Managers also have an economic incentive to befriend
rather than resist shareholder involvement: money.

 In contrast to the 1980s, money for investment in the 1990s will
be scarce relative to demand, the Oxford study says. Investors
who put up capital in the coming decade will insist on being told
much more about companies than they have been told before. And
companies will have to take steps to buck the widespread belief
that their boards too often are puppets of senior management,
academics and others say.  Relationship investing will be espe-
cially helpful for small companies, traditionally the biggest
producers of jobs, said Carolyn Brancato, staff director of the
sub-council on corporate governance of the Competitiveness Policy
Council, a commission set up in 1988 by Congress and the White
House to study America's competitiveness position.

 Often, new firms have had to turn to private sources of money,
where federal disclosure requirements about profits don't apply,
to find investors who aren't turned off by forecasts of early
losses and who will provide money for a long period.

 Ira Millstein, a lawyer who lectures and writes extensively on
corporate governance, is more measured in his support of rela-
tionship investing, arguing that it will produce the desired ef-
fect only if stock analysts and other researchers also look at
longer time frames for investments.

02:03 11-03C9999-----

Copyright 1992, The Washington Post.  This story is from the
Washington Post's Capitol Edition On-Line and is not to be ar-
chived or redistributed.

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