Coporate Governance: A 20 Year Overview
A Quick Look-Back At “Shareholder Service”, “Shareholder Relations” - And The Securities Industry As A Whole Over 20 Fast-Changing Years – All Leading Up To Today’s “Glorious Days Of The Corporate Governance Movement”
Your editor found it almost hard to believe that he has been editing and mostly writing The Shareholder Service OPTIMIZER for 20 years now. Testimony, we guess, to his innate stubbornness, but equally due to the fact that trying to “optimize” the time and money spent on providing services to shareowners IS an important thing, he believes. And the total dollars spent on such services – while much, much less than what companies were spending in 1994 – are still mind-bogglingly large amounts.
So we thought it would be a good idea to “follow the money” over the past 20 years – and how our mutual priorities – and the corporate and supplier-community budgets of time and money have shifted along the way – to see what lessons we might learn. This will be the first of a two-part “Anniversary Issue” – the second to come as part of our year-end special supplement, when we can devote more space – and we hope, more time to graphics, and to our “History” section than we usually do in our quarterly issues.
The first thing that strikes us as we look back is how much bigger the shareholder servicing business was 20 years ago, both in terms of “units of work” and in terms of the number of “suppliers” of various services it supported: Back in 1994 there were well over 100 million registered shareholders, vs. fewer than 40 million today – a number that continues to shrink by 5% or more per year. There were also about 8,500 ‘investment-worthy” public companies back then, vs. only 5,000 or so today, thanks mostly to M&A and “going private” activities.
Virtually every interaction one had with the hundred-plus million – plus the 200-plus million street-name holders (a number that has stayed relatively stable over the last two decades) involved printing and mailing paper documents of one sort or other – which generated truly mind-boggling “units of work” – mostly intensely labor-intensive and accident-prone work – and monstrously large piles of printed matter: The 100 million or so registered holders gave rise to about 150 million stock certificates per year back then – all typed-out, folded, inserted into envelopes and mailed, mostly by hand – to fulfill transfers of ownership. Today, thanks to book-entry-ownership programs, we doubt the entire industry issues even a million certificates a year.
Come annual meeting time, the AT&T annual reports alone required eight jam-packed railroad cars, and sometimes more, to transport them to the mailing-house…And that’s before the then separate Notice of Meeting and Proxy Statement, a paper proxy card, return envelope, outgoing envelope… and usually a ‘stuffer” or two were inserted into the big fat packages and mailed out, usually by first-class mail.
Almost every public company also mailed three quarterly reports to shareholders back then, usually stuffed in with a paper dividend check, since ACH transmissions were new, and kind of scary to most shareholders back then. But one of the “hot new products” in the early 90s was a toll-free number that interested shareholders could call to hear a recording of the Q-R read to them in lieu of getting a paper copy! (This May we were startled, but actually pleased to receive an old-fashioned quarterly report in the mail - from a nice, smallish and very shareholder and customer friendly “regional bank”: The first printed QR we’ve seen in over 15 years!)
No surprise, there were dozens and dozens of financial printers back then vs. the scant handful of big printers today – most of them making a very fine living, printing and sometimes mailing all this stuff, while racing the clock and charging “premium prices” to do so. Several of the biggest printers had luxurious hotel-like suites, open bars and fine kitchens and kitchen staff on site for the frequent “all-nighters” involving company officers, inside and outside counsel and a passel of paid advisors, proxy- chasers, etc. that an IPO or tender offer or proxy fight would give rise to. They would all review the “proofs” – quite literally hot off the presses – mark them up in pen, and wait to review the “corrections” – which took more time, and for which companies paid through the nose, since the “word-processing software” we take for granted today was not available to printers, much less integrated into the printing process back then.
Back in the 90s, there were over 1,000 SEC-registered Transfer Agents – and while today, there are still a few hundred left, the six biggest agents have 87% or more of all the “units of work” – and oops, in June the six shrunk to five. (And what we think was the old seventh-largest TA just got shut down by the SEC and “rescued” by the number-three agent, as you’ll read below…And, sorry to say it, we feel sure that consolidation will continue in this business, simply because there is not enough work to go around.)
Another huge change in the shareholder servicing/shareholder relations landscape has been the mega-shift in share ownership - and the “institutionalization” of the overall stock market, that began in the late 1970s, when individual investors owned over 70% of all outstanding equities, but accelerated rapidly in the ‘90s and into the Y-2K era until today, when institutions own 60% to 70% of all equities and often own 80% or more of our largest-cap companies.
This, of course, has wrung much of the “busy-work” out of the shareholder servicing businesses, while forcing companies to pay more and more time and attention to the desires and demands of institutional investors.
Another big change; while even into the 1990s, an individual investor complaint would cause public companies and their suppliers to jump into action at once - today’s Moms and Pops ‘don’t get no respect’ from the powers that be at many companies, which is a sad thing, and a bad thing we think. A very troublesome but not surprising side effect here, individual investors – who still own over 30% and sometimes as much as 50% of some public companies – and who used to vote proxies for over 70% of their holdings, almost always for the management positions – are currently voting only 27% of the shares they own, and the number keeps dropping every year. Meanwhile, institutional investors vote almost 100% of their shares – especially if they have a gripe. These facts, plus the fact that the very best companies still do give their “retail” and customer and retiree-investors the respect and attention they deserve to get, gives us a bit of hope that the tide will eventually turn, but most days we’re more skeptical than not.
The biggest single “disrupter” of the status quo over thepasttwentyyears– byfar– has, of course, beenthe Internet, which in 1994 was literally in its infancy: It was used almost exclusively by “computer geeks” and “techies” – and was viewed with pure terror by most folks over 39 – which most shareholders tend to be. No e-mailing or web-surfing for them! No “self- service websites” either, which today resolve over 60% of all shareholder inquiries, and fulfill about the same percentage of requests for “forms” - when the company and its TA are on the ball. Notably, there was no “Notice and Access” back then either, which has wrung literally billions of dollars out of prior printing, paper and postage costs.
But the biggest impact of the Internet in the lives of corporate citizens, as we correctly warned here over ten years ago, has been the abilities it gives investors to instantly and inexpensively search out, sort, and evaluate data on virtually every metric of corporate success – or failure to succeed….and…to enable interested investors to communicate, swap notes and coordinate with one another…which has given rise to the “Glorious Age of Corporate Governance” that we find ourselves coping with today.
One of the biggest changes that strikes us right off the bat is that back in the 1990s, no one we can recall ever talked about “Corporate Governance”: Most of the corporate and shareholder proposals on the A-M docket were driven by a relatively small handful of specific “issues du jour,” rather than by an ever-evolving series of over-arching ideals as to what “Good Corporate Governance” should encompass, as is the main mode today.
Today of course - and another really huge change - “Corporate Governance” has turned into a mega-industry of its own – with literal hordes of governance raters, writers, raiders, commentators, data-compilers, legal and tactical advisors – all clamoring for attention…and for a mighty big new pile of fee-based and deal-based income. Not so surprising under the circumstances, the proxy solicitation and proxy advisory businesses are the only segments of the 1994 supplier universe that have actually grown in numbers over the past ten years, although here too, the field has become overcrowded, and is already beginning to shake-out, and separate the wheat from the chaff, as we have been predicting.
Most significantly, while yes, we had lots of “raiders” and “green-mailers” back in the 90s, “Corporate Governance Issues” have become a major tactical wedge for all sorts of “activist investors” who are hell-bent to squeeze more money out of public companies – often with no regard at all for longer- term investment considerations.
Please note that this has not necessarily been a ‘bad thing’ at all for most corporate citizens who are involved with the care and feeding of investors, as most of our readers are: We like to tease our many Corporate Secretary friends that “If it were not for the Corporate Governance movement, you’d still be sitting in the back of the room or against the wall, silently and anonymously scribbling notes for the minute book.”
But the biggest change the Internet and the “information age” has wrought in terms of public- company lifestyles, and those of their suppliers too, has been in forcing public companies to focus more intensively on the ‘metrics’ of their businesses, and those of peer companies – and on being sure to hit one’s short-term targets – which, sad to say, has forced many public companies into adopting an excessively defensive, short-term focus. Around the year 2000 we began to remind readers that the overriding corporate imperative is “to do more with less” – and this imperative continues to impact virtually every company and every corporate citizen we know.
Among the scariest things we see these days are corporate people being seriously over-stretched and over-worked; more and more “early retirements” of key employees; minimal and often no “information transfer” at all to their successors – and, far too often for comfort, key jobs being sliced and diced into smaller pieces, and parceled out to existing, lower-level workers…with no one left who is able to see, much less deal with the ‘big picture”… all of which equates in our book to a “penny-wise, pound foolish” scenario that is good for no one, and that is actually quite dangerous to corporate good health.
There’s a big upside to all this, however, in that “optimizing” one’s always scarce resources is more important than ever – And Lord knows, there is still more room for optimizing than there are people with the time and know-how to optimize on their own! So we guess we’ll keep on truckin’ for as long as our eyeballs and brain cells hang in there.