Bank directors are under intense scrutiny these days from shareholder activists wielding tremendous power and influence. These shareholders are refusing to take a back seat to the interests of the "institution" and its broader community, depositor, employee and regulatory constituencies. They are aggressively insinuating themselves into key decisionmaking processes and demanding that directors be proactive in serving shareholder interests and enhancing shareholder value.
Shareholder activists come in many shapes and sizes, from the most visible, such as Michael Price's Heine Securities, to the most established of institutions, such as Fidelity Investments. Their tactics range from applying subtle persuasion to overt and blunt pressure. They are a force to be reckoned with, and a group that one does not cross without risking severe repercussions.
Recent Guidepost
There are numerous recent episodes of shareholder activism, and directors of public banking institutions are well-advised to study these situations carefully for the various lessons to be learned. Among other noteworthy examples are:
* Michael Price's year-long campaign to encourage Michigan National to promote greater shareholder value. In response to Price's efforts, Michigan National adopted a comprehensive restructuring program that positioned the company for a highly attractive premium sales transaction with National Australian Bank. * Price's 1995 13-D filing with respect to Chase Manhattan Corp. Chase has initiated a significant cost-cutting effort in response and has become a near-constant subject of takeover and merger rumors. * Mid-Atlantic Investors' successful efforts in defeating an announced merger-of-equals transaction by United Financial and forcing the ultimate sale of the South Carolina thrift to First Union. Mid-Atlantic also waged a successful shareholder proposal campaign at Bankers First, causing the company to put itself up for sale. * Rumors of "subtle persuasion" exercised by the large institutional investors at Shawmut National Corp. that encouraged the Shawmut board to seek out a strategic merger with Fleet Financial Group. * The loud and prompt response by shareholders at Bank of Boston Corp. that helped derail negotiations with respect to a merger-of-equals transaction between Bank of Boston and CoreStates Financial Corp. and added to the turmoil in the Bank of Boston boardroom that lead to chairman Ira Stepanian's recent resignation.
Growing unrest in the boardroom is not limited to financial institutions. Morrison Knudsen, Kmart and W.R. Grace are just three recent examples of the increasingly prominent role of shareholder activism and the increasingly important role of outside directors at major public companies. Since bank directors typically also serve as directors of leading non-bank companies, it is not surprising that general developments in the corporate governance arena can influence their behavior when sitting in the bank's boardroom.
Directors Under the Spotlight
The boardroom has moved center stage in the bank consolidation and restructuring movement, and the actions and strategic decisions of bank directors are increasingly coming under the spotlight of public shareholder review and criticism. Shareholders are no longer simply voting with their feet - unless you count using their feet to give directors and CEOs a figurative swift kick in the rear. They are sticking by their investments and taking aggressive steps to insure that those investments provide them with the attractive returns that they themselves have promised to their fiduciaries.
The new activist role is the result of a number of forces coming together at once. First and foremost is the fact that bank stocks have become a hot commodity, and over the past several years a whole new set of aggressive investors have entered the field. Numerous hedge funds and more traditional mutual funds have been established to invest in bank stocks, and these new investors are highly performance-driven.
Second, the relaxation of the federal proxy rules implemented in 1992 has enabled institutional investors and large individual investors to communicate more freely among themselves. In light of the large blocks of shares that are typically controlled by a few of the largest investors at any given company, the ability of shareholders to freely communicate without fear of violating the proxy rules has led to a substantial increase in the ability of shareholders to wield influence in the boardroom.
In a matter of hours, a company can find that holders of 20% to 30% or more of its shares have spoken to one another to form a view on any given matter before the board - and in a matter of minutes, such shareholders can be on the phone to management and the board expressing their views.
Michael Price was able to make successful use of the new proxy rules in 1994 when he orchestrated a vocal demonstration of shareholder unrest at the Michigan National annual meeting without ever filing a proxy statement or fight letter with the SEC.
Finally, banks are themselves becoming the subject of unrest as they struggle with the fundamental changes effecting the industry. As in any time of great change, there are pressures which arise as competing constituencies and opinions surface and as boards struggle to define and execute the best strategic course of action. Recent shareholder activism in many ways simply reflects the natural reaction among larger institutional shareholders to make sure that they have a seat at the table when these important issues are debated.
Understanding the proper role of the board of directors in good corporate governance involves consideration of two key relationships: (1) the relationship of the outside directors to the CEO and other key members of senior management; and (2) the interaction/relationship between the board, management and the shareholders, the ultimate owners of the corporation. It also involves an understanding of the role of process in assuring board decisions are carefully considered, and a heightened focus on the substantive results that are achieved.
Much attention has been focused in recent years on the need for boards to develop appropriate rules of governance. Calpers (the big California pension fund) has led the charge in encouraging boards to "evaluate and define governance principles that will help guide American corporations into the 21st century." The leading example of such efforts is the General Motors' 28-point guidelines adopted during the 1994 proxy season. Numerous other companies have followed suit.
The focus of such guidelines to date has been on insuring an active role for outside directors in setting the governance agenda and in reviewing management performance. As Calpers itself acknowledges, there is no single governance model that is appropriate for all companies. Each company has to establish the procedures and relationships that will work best for it.
More importantly, no set of guidelines can replace commonsense judgment in the development of good interpersonal relationships between management and the board and between the corporation and its shareholders. Notably, Chase Manhattan's A+ grade card from Calpers did not prevent Chase from coming under Michael Price's scrutiny.
Exercising Sound Leadership
In the end, good corporate governance means the exercise of sound leadership by directors within the boardroom and by management outside of the boardroom.
Boards and managers must be strong leaders. They are ultimately responsible for the decisions that are made on behalf of their institutions and for determining the destiny of their institutions in the ever-changing competitive landscape for U.S. financial institutions.
The guidelines that they should follow in this effort are simple and straightforward:
1. Listen. Be open to the legitimate issues and concerns raised by the company's shareholders and be pro-active in addressing those concerns.
2. Make sound, informed decisions. Be professional and thorough in the review and evaluation of strategic options. Exercise sound business judgment on a fully informed basis.
3. Put shareholder and company interests first. Avoid even the appearance of divided loyalties.
4. Be prepared. Educate the board about the company's strategic strengths and weaknesses and about the takeover/consolidation environment. Build a strong foundation for action well in advance of the consideration of any specific strategic option.
5. Meet regularly and review strategic developments and options regularly. Use expert advisors to help educate the board and to help execute the company's chosen strategic plans.
6. Speak with one voice. Disagreements concerning strategic options should be aired only in the boardroom. Outside of the boardroom the board and management should speak with one united voice.
7. Speak through one spokesperson. Communications with shareholders and potential strategic partners should be funneled through one main individual, the chairman/CEO.
8. Maintain control of the strategic decision-making process - don't let the process control you. There is no duty to explore any particular strategic alternative. Remember that you may not be able to fully control any given process once discussions with respect to a transaction expand beyond the boardroom.
9. Maintain strict confidentiality. The strategic deliberations of a board and its management should be kept in the strictest of confidence. Nothing will derail a strategic transaction or cause potential turmoil faster than a premature leak.
10. Defend your actions and decisions. When strategic decisions are made, build a strong case to defend the chosen course of action and be proactive in selling the story to shareholders and the public.
