David Williams, our governance web editor reviews Jeff Gramm’s Dear Chairman: boardroom battles and tries of shareholder activism (Harper Collins, 2015).
It is frequently argued that the best way to reflect on practice in a given sector is to look at what happens in other sectors. This is true with ‘Dear Chairman’, which looks at the rise of shareholder activism in the United States (US). Many of the conclusions contained in the book apply to governance in higher education (HE) and beyond.
The author, Jeff Gramm, a head fund manager and adjunct professor at Columbia Business School, looks at eight case studies, stretching from the 1920s to more recent time, to show the impact of shareholder activism on governance. The book also includes a selection of the ‘Dear Chairman’ letters written to the chairs of the boards of the companies featured.
The earliest case study looks at an oil pipeline company, Northern Pipeline. It shows what happens if disinterested shareholders are combined with a board of directors dominated by supporters of management: accountability is lost. The situation was made possible by the limited information the company was required at the date of the case to provide to shareholders. Lacking information shareholders were in the dark. The actions of an activist outsider brought change. The role of the ‘outsider’ as the catalyst for change is found in many of the examples cited in ‘Dear Chairman’.
The case of American Express illustrates how a major investor in the company, Buffet, supported the group’s chief executive. American Express’ warehousing subsidiary had guaranteed stocks of soybean oil. When as a result of a fraud on the value of stocks guaranteed to third parties the company faced significant losses, a group of shareholders argued the company should contest the claims. By contrast, Buffet urged management to compensate in full to maintain the reputation of the company. Buffet recognised that as a service company the value of the American Express rested on its name. Its long-term reputation was more important than any short-term gain.
The action of the Chief Executive Officer (CEO) supported by rest of the board bought out and removed a major shareholder and dissident director of the multi-national car manufacturer, General Motors (GM). The case shows how far the company was prepared to go to remove a well-informed critic of the company’s strategy. It also powerfully illustrates that having a board of high-calibre directors does not mean the board is effective. In GM’s case, such directors did result in an effective board.
The CEO and the largest shareholder, the daughter to the company’s founder, fought each other in the case of R P Scherer, a company manufacturing soft gelatin capsules. The two protagonists were also married to each other.
Scherer illustrates the perils of allowing directors to be picked by the CEO. The directors’ loyalty was to the CEO, rather than to the company. Conflicts of interest made the situation worse. Many of the individual directors worked for companies who were suppliers or advisors to Scherer. These directors had an economic interest in preserving the position of the CEO. Further, the CEO had picked at least one director ‘because he’s weak and he’ll do what I tell him to do’.
The individual cases allow wider conclusions about corporate governance to be drawn. These include the risks of ‘independent’ directors having deep connections with the CEO. The husband and wife example in case of Scherer, suggest that independence is a state of mind. Gramm suggests that once on a board independent directors inevitably develop closer relationships with management. He argues that humans are social beings, and connections develop over time; he quotes Buffett as saying ‘the nature of boards is that they are part business organisations and part social organisations. People behave part with their business brain and part with their social brain.’
The importance of having a thorough understanding of the company’s business is an important trait of a good director. Noting that in the case of private equity, where it’s their money, directors will act if things go wrong; by contrast boards often wait too long to get rid of poor people.
When governance goes wrong shareholders share some of the blame. Gramm’s conclusion is for the system of corporate governance to be effective it requires the ‘right’ professional managers, directors and shareholders. i.e. the three elements need to be present. Given Gramm’s analysis, who fulfills an equivalent role to that of the shareholders in the case of ‘public’ higher education institutions (HEIs)? Or in the words of Gillies ‘who guards the guards’.
Dear Chairman is not a book that most governors or clerks/secretaries of HEIs should rush out and buy, but it does illustrate the value of looking from a different angle to gain a better perspective on good governance in higher education.
- Take a look at our newly revamped governance page to discover what services we offer to support governors in higher education. Visit www.lfhe.ac.uk/governance
- Read about our latest Hefce sponsored project focussing on supporting governing bodies to be able to monitor standards in their institution. http://bit.ly/1VVJWOG