<B>The unbearable lightness of shareholders</B>

Joaquín Garralda. Strategic Management Professor. Instituto de Empresa

19 June 2003

The author describes the role and power of “light,” or non-majority shareholders. In the past, when looking at photos from general meetings of major companies, we often saw the boredom on faces of Chairpersons when forced to reply to minority shareholders in questions from the floor.

Administrators looked like they were swallowing a bitter pill against their will: the sooner it’s over, the better. Maybe that is why they hand out sweets at general meetings. In any event, most often the CEO’s reply had nothing to do with the company’s situation - which didn’t matter, so long as appearances were kept up. Then - see you next year!

Shareholders were supposed to be equal, but some were more equal than others. Those with major stakes held seats on boards, while fund analysts had their own system of communications.

Nowadays – after some notorious scandals – we are seeing strong demand by social agents and politicians for transparency from company management and increased responsibility on environmental and social issues. What role do light shareholders play in this process (“light” meaning those not on the board and whose only power lies in their right to sell, keep or purchase more shares)?
There are two categories of light shareholders: institutional investors, and individual shareholders, or families.

For years, the former have consistently maintained their stance of not intervening in the running of the company, in order to retain their freedom to sell when they saw fit. But Lord Cadbury, in his initial analysis of corporate governance, remarked that most often this was a fallacy, as withdrawing from holding 10 or 15 percent of a large organization was no easy matter. Today, major reductions in the value of investment funds – results of stock-market decline - have made contributors more demanding of managers, obliging them to take a more proactive role in companies they invest in.

[*D The U.S. and Europe *]

In the United States, demand for transparency and good governance has a longer tradition. The CalPERS fund – one of the U.S.’ most important – puts companies that fail to meet its good governance standards on an Observation List. Its website publishes steps those companies have taken to improve their assessment.

What about Europe? Funds in the United Kingdom follow the activist example. This can take the form of publishing lists with their opinions on how companies respond to social responsibility issues; or, in other cases, voting against the management approach or bonuses awarded administrators. In Germany, several funds have voted against the customary transition from CEO to Chairman of a large firm, even when results have not been good. These moves were previously adopted without any problem, as a mere formality at General Meetings.

Is Spain just as activist? It would appear that our national funds are not. Banks’ participation in shareholder composition of major corporations and, in addition, their status as fund managers, to a large degree constitute a conditioning factor. Nonetheless, if we analyze data from the Madrid stock exchange on shareowners of companies listed in 2001, we realize how little weight Collective Investment held (4.86 percent) compared to Families (27.96 percent) and Non-Residents (35 percent). To put these data into perspective, the largest Spanish companies had around 1 million shareholders at the end of 2002.

Are they all “asleep”? Non-residents – given the international context mentioned above – probably are not. But at the moment, it seems that Spanish Families are principally concerned about share value and its effect on the net worth that will permit them to enjoy old age comfortably. However, if we consider impact of measures proposed by the Aldama Commission – which look to become legally binding for the most part – the probability is that we will be gazing at fewer photos from General Meetings like the one mentioned at the top of this article.

Among these measures, the obligation to establish effective channels of communication with shareholders via the website is key. This creates the possibility of voting electronically on points on the agenda for the General Meeting. Difficulties in attending Meetings generally worked in administrators’ favor. But if the law will require the process be simplified, that governance practices become more transparent, that electronic voting be allowed and, what’s more, that information needed to be able to express opinions be distributed sufficiently in advance, things are certainly going to be different at General Meetings in future.

One indication of the drive in this direction is the recent announcement by a major Spanish bank, which proposed – with plenty of lead time - that its shareholders e-mail suggestions for matters they thought should be taken up at the next Meeting. On the European Union website citizens are asked whether they feel it is a good idea to be able to vote electronically on issues concerning them. This is direct democracy, like in Switzerland. Of the 40,000 votes polled to date, 71.6 percent stated it was “a really good idea.”

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