Capitalism by Proxy Fight | Wall Street Journal | 11.22.09

It’s no secret that sometime in the fall of 2008, the waters of the Potomac River began to flow into the Hudson. With the vast underwriting of Wall Street financial firms by the government, a handful of corporate executives received a searing education on Washington rules under klieg lights.

Now the world of politics is about to intrude on all corporations, importing the noisy paraphernalia of campaigns, spin, opposition research and the demonization of individuals into the election of board directors.

Few executives are prepared.

This brave new world will erupt in 2010 once the Securities and Exchange Commission votes early in the year to issue new rules to mandate more liberal “access to the proxy”—which it is almost certain to do. In theory, granting shareholders the right to nominate board members at corporations’ expense will bring about shareholder democracy, creating competitive elections and forcing executives to defend their business decisions. In practice, access to the proxy promises longer and more intense debates, if not chaos.

Top executives, no matter how well they run their business, will be forced to mount counter-campaigns to fend off a range of well-funded players with multiple agendas. They will be besieged by institutional investors with grudges and union pension funds with political agendas, as well as powerful special interest groups.

The surface discussion will be about “say on pay,” or “global warming disclosure,” or “sustainability reporting.” The underlying substance—and the critical change in corporate governance—is about placing people on boards who answer to constituents, not investors.

Of course, corporations have always had to deal with multiple stakeholders. This time, however, the environment will have six new features.

• Social-media savvy. The new corporate governance activist will be sophisticated, businesslike and armed with sharp questions based on deep knowledge. Social media along with other technologies will allow activist leaders to assimilate information quickly, disseminate it instantly, and adjust campaigns rapidly to counter corporate defenses.

• All hands on deck. In the past, the chairman of the board ran the annual meeting, calling on others infrequently. Now many directors or top management—from the chair of the compensation committee to the chair of the risk or strategic-planning committee—must be ready to fully explain their committee’s process and analysis, as well as defend their decisions.

• Hidden agendas One set of issues will be political and social. The other will be corporate governance concerns on executive pay, or the wisdom of a given product line or merger. These lines will blur. A campaign on, say, executive pay, may in fact be a stalking horse for promoting a director who stands for unionizing the work force, or embracing a “green” initiative.

• The end of privacy. It no longer matters that cameras are usually barred from annual meetings. With cellphones and cameras easily masked as ordinary objects, executives will need to comport themselves as if any instant held the potential for YouTube infamy.

• Permanent campaigns. Until now, corporate governance issues tended to be one-day stories. Thanks to the blogosphere and social-media activism, once short-lived controversies will now drag on for weeks or months. Witness the many permutations of a boycott movement against Whole Foods after its CEO, John Mackey, dared to offer an alternative to ObamaCare in this newspaper. The boycott was a dud, but the threat to the brand was real.

And in cases where groups do succeed in electing their directors, they will have savvy political and corporate insiders occupying permanent platforms from which to leak company information and agitate for more change. In this era of the permanent campaign, the corporate staff, general counsel and top communications and investor relations professionals must be ready to engage a permanent discussion.

• Silence=guilt. With unanswered charges only growing more damaging, corporations will have to start to think in the same strategically agile terms as activists. Most companies today now use social media to promote product. They must learn to converse with shareholders through their Web site and email, as well as Facebook, Twitter and a host of emerging media. This will require communications professionals to rapidly think through the global implications of every message, and company lawyers to approve statements with a new alacrity.

Most corporate cultures are allergic to this kind of interchange, and for good reason. Every public promise contains danger. Ford has managed its conversation well, in part by not needing a bailout, while Boeing’s promises on 787 test flights have become an embarrassment. In the new politicized corporate environment of 2010, with incoming missiles every day, the greater danger will be for those who stay out of the conversation.