The Original “Shareholder Activists” and the Founders of the Modern Corporate Governance Movement
LEWIS GILBERT (1907-1993) JOHN GILBERT (1914-2002)
Your editor-in-chief was fortunate to have been a witness to dozens and dozens of ‘performances’ by the Gilbert brothers at shareholder meetings, where he came to know them both. They loved the limelight, and they enjoyed stirring up the pot - and the audience too - as all gadflies do.
Often they hogged the microphones far too long for anyone’s good, but they were the original champions of, and untiring fighters for “Corporate Democracy.” Their efforts took the idea to an entirely new level when the SEC ruled, in 1946, that shareholders were entitled to submit proposals to management, and have them put to a vote. As you will discover, many of their pet proposals are still being fought over, and increasingly adopted by companies today - 80+ years after they began their campaigning.
The Gilbert family fortune was initially made in the California gold rush, where Lewis and John’s great grandparents sold pots and pans, pickaxes, denim pants, and whatever else the miners-49-ers needed. The family moved back east in the early 1900s and it was Grandma Gilbert who got the family into the stock market in an amazingly big way - by buying shares of every single dividend-paying stock on the New York Stock Exchange after the market crash of 1929 for literally pennies per share. Legend has it that Grandma also bought the eight-room Park Avenue apartment that later became the headquarters for the Gilbert brothers’ proxy-proposal-filing factory, and Lewis’es home as well - approaching the doorman after the apartment’s prior owner jumped out of the window.
Both brothers attended private NYC prep schools, after which Lewis began a moderately successful career in journalism. But, as Lewis famously told the press, they lived “on their dividends and interest - just like everyone else.” John, who absolutely worshipped his brother, never worked a day until he met his wife-to-be - who eventually came into a pretty big stock portfolio of her own. Her father refused to give her permission to marry to a man who’d never held a job - so, as Lewis told your editor, John wrapped books at Brentano’s for a few weeks during the holiday season, until the father relented. John and Margaret became the most doting and devoted couple we’ve ever seen -and they too lived on Park Avenue, just a few blocks away from Lewis and “the office” as they called it.
Lewis attended his first shareholder meeting in 1933 - the Consolidated Gas Company, soon to become Consolidated Edison, in Brooklyn, N.Y. “I expected to be welcomed cordially and to be treated like one of the owners,” he later said. “I got up to ask a question, but before I had a chance to say anything, one of the officers sitting in the back of the room made a motion to adjourn.” Back then, the typical annual meeting drill consisted of reading the minutes of the last meeting - or waiving the reading by voice-vote - then reporting on the election of directors, since the deciding votes were already in. There was no such thing as a written annual report to shareholders, much less a ‘shareholder proposal’ that would ever be given a moment’s consideration. Questions from the floor were decidedly unwelcome, and almost unheard of, since shareholders other than the top management were almost never in attendance back in the early ‘30s.
Lewis - with brother John mostly ‘in tow’ initially - set out to change all that. Thanks to Grandma, they had holdings, mostly smallish ones, in over 1500 stocks. Soon, they were attending as many as 150 shareholder meetings a year, all around the country - sometimes together, but usually dividing up the duty, since so many meetings occurred on the second and third Tuesdays and Thursdays in April back then. Their ‘shareholder activism’ coincided with a steadily growing interest in stocks, and a big upsurge in stock ownership by individual investors as the economy, and the stock market began to recover and then took off in a really big way, beginning in the 1950s. They founded a non-profit organization, Corporate Democracy, Inc. and for 40 years - from 1939 until 1979 - they published their own Annual Report. It covered, and rated the shareholder meetings they attended, along with the CEOs and the good - or bad - “governance matters” the Gilberts raised. They typically ran to 270 pages or so, including 15-20 pages of photos - of them, and their allies - and the CEOs of companies that treated them respectfully - several of which are reproduced here.
Many of the Gilbert’s then standard questions are still amazingly good ones; too rarely asked these days at shareholder meetings: “Have there been any changes to the Bylaws since the last meeting?...What did you pay your outside lawyers…and your independent accountants last year, and how does that compare to the year before?...How many staffers were in the internal audit department vs. the prior year, and what accounted for the variance?...What are your plans to raise the dividends?” Lewis would usually have numerous questions about the footnotes too, probing for weaknesses and for actual or potential problems that were not clearly disclosed in the annual reports - and he always went out of his way to educate the individual investors in the audience about what to look for in annual reports and the 10-ks. He especially loved to admonish impatient Chairmen, in a loud and imperious voice, that “YOU work for ME.”
In many ways, today’s institutional investors advocate and hew to standards that are much like those the Gilberts advocated: They considered themselves to be shareholders for life, running a mini-index fund of their own and bragging that they never sold a single share. They looked hard at where - and how - the corporate cash was being spent - and they put shareholder returns first and foremost on the agenda. They hammered away on outsized executive pay - far harder, we’d say, than most professional investors do today. They were huge supporters of cumulative voting, which they recognized early-on as an incredibly powerful weapon in terms of being able to oust selected directors and “refresh” overly entrenched boards. They successfully prevented many companies from ditching the standard (which was the standard in many states back then) and actually got a few companies to adopt it!
They hated staggered boards - and mounted several successful campaigns to head them off, or to have companies repeal them. They were also strong supporters of “preemptive rights” that would give existing shareholders first crack at any follow-on financing or new issues of convertible securities, so as not to dilute their holdings unless they failed to participate. Back then, rights offerings were common - and often, the rights had fairly significant cash value to investors, who could sell them easily, through the ‘rights agent’ if they did not want to buy more shares. (We sure wish they would come back!) Unlike today’s activists, however, the Gilberts hated mergers - unless they were fully stock-for-stock deals - and they urged companies to let small shareholder round-up any fractional interest, rather than being paid in cash.
The Gilberts were also among the first investors to urge companies to put women on boards, and to seek out minority directors. They were great friends and supporters of women’s rights champion Wilma Soss, whose own history can be found on our website. From the beginning of their campaigning, they asked companies to allow shareholders to nominate directors…something that occurred over 80 years later!
Their new “job” as shareholder activists came with very nice benefits, in that all of their travel and lodging expenses were tax deductible, and the brothers - and Margaret too - were typically taken to nice places for breakfast, lunch and dinner by company officers who wanted to get a preview of all the questions the Gilberts intended to ask, and all the remarks they intended to make…which tended to be many. One of their pet proposals was for companies to rotate their annual meetings to sites around the country where they had significant numbers of shareholders and/or operating units - and not to out-of-the-way “hamlets” which many companies chose on purpose - which would, of course, produce a steady stream of junkets to new places for the Gilbert family.
The brothers presented quite a contrast at meetings, both in style and substance: Lewis was the statesman; erudite, well prepared, sharp as a tack - brandishing and referring to a big sheaf of notes - and very fast on his feet in a debate. He was also quite a dandy, dressing sharply in well-tailored suits and sporting flashy pocket-hankies and eye-catching and expensive neckties. After Memorial Day he’d often appear at meetings in a seersucker suit, with a Panama hat and white shoes.
John, on the other hand, was quite literally the clown: He favored strikingly loud sports coats - many of them clearly custom made - with big, bold plaids and checks or fanciful patterns, usually paired with equally loud golf-pants and white patent-leather or wildly patterned, big-buckled belts, He almost always sported a loud, but very snappily tied bow-tie or, occasionally, a bolo. At most meetings he would wear a big red clown nose - sometimes to make his point that the chairman was a clown - but often just for fun - and to draw extra attention to himself. If any scandals were reported in the press, he’d don a deer-stalker hat and peer through a magnifying glass as he asked his questions, to “investigate” and get to the truth, he’d say.
John was not much of a questioner: If he had issues with the management, his favorite tactic was to honk a loud bicycle horn, with a big red rubber bulb, whenever he disagreed with the chairman’s point, or with that of another attendee…And all too often, the Chair would let him get away with it! While Lewis was never evicted from a meeting to our knowledge, John was physically removed from many of them, for failing to yield the microphone or for arguing loudly and at length with meeting attendees, who often tried to shout him down or shut him up - which sometimes ended in a scuffle. He moderated his behaviors as he got older - and whenever Margaret was around to pull on his sleeve. Later in life, after he attended and graduated from Clown College, which he was immensely proud of, he adopted a more jocular style, showed-off his diploma and often passed around clown noses to the audience.
A very big part of their success - and fame - was based on showmanship, and on saying and doing things that would make the newspapers. Frequently the brothers would engage in a bit of by-play, and sometimes in shouting matches with Evelyn Y. Davis - another gadfly and a serial shareholder-resolution proponent who loved to hog the limelight herself - and whom the Gilberts loved to taunt. One of our own most unforgettable meeting moments was at the Bristol Myers meeting, some 30+ years ago, when the Gilberts asked the Chairman, and the meeting as a whole, to note “An important anniversary - the ‘Xth’ anniversary of Evelyn Y. Davis’s arrest….for prostitution” - and passed out reproductions of the centerfold from the New York Daily News, showing her being led away from her “secretarial-service” office in the Empire State building, in handcuffs.
The Gilberts’ biggest breakthrough on the Corporate Governance front came in 1946, when they launched a campaign against Transamerica Corp., which culminated in SEC rulings, later upheld by the U.S. Court of Appeals, that shareholders had the right to ratify the appointment of outside auditors - and the right to submit shareholder proposals that would be put to a vote at shareholder meetings.
Suddenly, “the office” began to churn out shareholder proposals at a record rate. Most years they filed and introduced over 100 shareholder proposals, and co-sponsored, or spoke up at meetings on many more. Their 40th Annual Report, in 1979, featured five full-time staffers who would often represent them at meetings on busy dates, and as a little perk for them, and where they too would pepper the management with a barrage of questions. The Gilberts also had a network of fellow activists and friends - like Martin Glotzer in Chicago- who still appears and sponsors or introduces proposals at many meetings - and his wife Pearl - who would introduce the Gilbert proposals if all them were at other meetings. In 1983, a record year for them, the Gilberts sponsored 198 proposals, or 20% of all the proposals that were up for a vote.
Whatever we may think about their serial proposals, their theatrics and their love of the limelight - and of the microphone at shareholder meetings, the Gilberts were the first to identify most, if not all of today’s top corporate governance issues. While they lived to see many of their goals achieved, it is rather amazing to see some of them catching fire 80+ years after they were first proposed!
The editor wishes to thank long term friends Martin Glotzer, for sending him several issues of Lewis and John Gilbert’s Annual Report, and Alexander Miller, for sending him the December 11th and 13th 1948 issues of The New Yorker magazine, that featured a 2-part profile of Lewis Gilbert by John Bainbridge, all of which have numerous and fascinating details for those who’d like to lean more about the amazing Gilberts.