Who owns the corporation? And who should control it? Corporate governance can, at the most rudimentary and abstract level, be distilled to those two questions -- that is, if you can tune out the high-pitched debates about proxy access, executive compensation and other issues driving regulatory reform. If you adjudicated those seemingly benign questions in a court of law, you might have Ira Millstein representing shareholders and Martin Lipton making management's case. This is not new. Millstein, 83, and Lipton, 79, staked out their positions on the legal yin and yang of governance 30 years ago, and their distinctly different worldviews on the role of corporate boards and shareholders encapsulate the schools of thought that still define the governance debate.

Millstein, a senior partner at Weil, Gotshal & Manges LLP, mostly takes up the orthodox position, though his views on board oversight were rocked a bit by the financial crisis. Still, he is as close to a founding father of the shareholders-as-owners model as you can get, arguing that stockholders own companies, asserting power by electing boards to ensure that companies are managed in their best interest. It's an appealing power-to-the-people message, particularly fresh off of a financial crisis that heaped a mountain of pain on Main Street. Leading shareholder democracy advocates such as Harvard Law School's Lucian Bebchuk, and Robert A.G. Monks and Nell Minow, co-founders of independent research and rating firm the Corporate Library, take a similar view.

Lipton, by contrast, is a powerful and still-ubiquitous proponent of stakeholder theory, at least in corporate circles. As Lipton sees it, management and directors should run business as they see fit, considering the interests of creditors, employees, customers and the community, in addition to shareholders. His view was shaped, in part, he says, by Adolph Berle, who advised Lipton on his 1955 thesis on corporate law. Berle, a Columbia Law School professor and FDR Brain Truster, co-authored with Columbia economist Gardiner Means the 1932 classic, "The Modern Corporation and Private Property," which warned against unchecked management power.

"What people don't quite understand was that Berle was most interested in the social responsibility of companies," says Lipton. "His principal interest wasn't the protection of shareholders. It was the protection of society. Making sure corporations complied with the social legislation that he was about to be so heavily involved in in the early days of the Roosevelt administration. In large measure, Berle came to be a proponent of constituency theory."

That position has shaped the thinking of governance skeptics including Yale Law School's Jonathan Macey and Charles Nathan, a partner at Latham & Watkins LLP, who believe that the market is an effective check on corporate power, especially given that a large percentage of shareholders either don't vote or don't monitor corporate affairs closely.

"The reality is that most shareholders don't want to be bothered in voting," says Nathan. "To motivate them, we give them a document called a proxy statement, which no sane person would read and the most intelligent people can't understand. And for the lawyers who are forced to write all this gibberish, it is a totally useless destruction of forests. That's the reality."

To be sure, corporate governance is not neat and tidy, and in the backwash of the financial crisis the arguments and alignments of corporate governance have come under stress. Still, over the past 30 years or so, a dense array of public and private institutions, firms and academic centers has grown up dedicated to the pursuit of better "corporate governance," a general term that is almost always attributed to the pursuit of shareholder pre-eminence. This corporate governance complex, with major outposts across the country at research universities, the federal government, major pension funds and even public companies, generates considerable intellectual and financial firepower. In the pages that follow, we map that complex, describe its movers and shakers and lay out some of its fissures, schisms and alliances.

The truth is, governance has never been as neat and simple as many of its proponents, and most politicians, suggest. And the framework in which widespread corporate ownership (shareholders) and relatively narrow control (boards and management) should co-exist has been vigorously debated since Berle and Means first considered it decades ago.

Origins are always murky, but the start of the current era of governance clearly belongs somewhere in the recessionary '70s. Prompted by reports in the mid-1970s of illegal payments by U.S. corporations to foreign executives, the Securities and Exchange Commission held a series of public meetings on what was then called corporate accountability. Soon after, the SEC adopted some of the earliest rules about corporate committee disclosures, and in 1977 Congress passed the Foreign Corrupt Practices Act. Known best for prohibiting bribes to foreign company officials, FCPA also includes internal control provisions, a precursor of sorts to Sarbanes-Oxley.

That regulatory momentum didn't last. "When Ronald Reagan came into office in 1981, the commission didn't focus on regulation for many years," says Amy Goodman, who held several SEC posts between 1976 and 1987 and now co-chairs the corporate governance practice group at law firm Gibson, Dunn & Crutcher LLP.

The regulatory environment may have stalled, but the early 1980s proved to be a turning point in the development of the governance model that defined shareholders as owner and monitor. Reagan's assault on U.S. antitrust laws persuaded Millstein, then an antitrust lawyer, to try to expand his practice into corporate law. "I realized that without antitrust laws the only moderating force on corporate power was the ability of [shareholders] to get involved if things went wrong," he says. "I began to think about what in the corporate system might be better than smash-and-bang takeovers and lots of hollering, screaming and litigation. It seemed to me the best way to circumscribe excess power and deal with entrenched power was through the vehicle of better governance."

This was also a pivotal moment for Lipton. American companies were facing unprecedented levels of foreign competition. American corporations had been shaken up in the turmoil of the '70s, hit by high oil prices, recession and high interest rates. Rivals, particularly from Japan, grabbed market share from U.S. auto and electronics companies. In many cases, U.S. targets were unprepared, and the aggressors gained ground quickly. Meanwhile, corporate raiders such as Carl Icahn and T. Boone Pickens -- who today fancy themselves kinder, gentler activist investors waging the populist fight for Joe the Shareholder -- saw an opportunity to shake up entrenched management by taking offers directly to shareholders. They were empowered by the explosion in junk bonds from upstart Drexel Burnham Lambert Inc.'s Michael Milken and by the junk-fueled rise of private equity.

Management and boards had little ammunition against the first onslaught. Share prices were relatively low, shareholders unhappy, and directors and managers had rarely experienced the sense that they were not in control. "There were no cases that said a board of directors had the power to reject a hostile takeover bid," says Lipton. "By 1979, I had been struggling with that for about 10 years, giving opinions that it was within [a board's] business judgement. But it kept coming up. I decided it would be appropriate to lay out my thinking and I did in my 1979 article ["Takeover Bids in the Target's Boardroom"]. That provoked a storm and [my paper] was attacked in a series of articles."

Although Lipton invented the poison pill in 1982, providing companies a defense against takeover (and Wachtell Lipton a booming business in M&A defense), the broader climate was swinging toward Millstein and his shareholders-as-owners model. The Delaware courts began applying the business judgment rule to hostile takeover cases in the '80s, validating Lipton's position that boards could use the rule to reject bids, but also limiting the ability of corporate boards to just say no.

In 1985, Institutional Shareholder Services Inc., founded by governance pioneers Monks and Minow, emerged to help institutional investors meet their fiduciary duties under the Employee Retirement Income Security Act, or Erisa, which requires pension asset managers to vote every share of stock on every issue on a company's proxy. In its earliest form, ISS provided guidance on mostly routine governance matters to money managers with trillions of dollars' worth of pension assets and mutual funds under management. Acquired by RiskMetrics Group Inc. in 2006, the firm today, along with competitor Glass, Lewis & Co. LLC, wields enormous clout through its voting recommendations on issues such as board elections, CEO pay, and mergers and acquisitions.

With power comes scrutiny; the so-called proxy governance firms have, ironically, been criticized for their lack of accountability and increasing power. "The proxy advisory services are the two-ton gorilla in governance," says Gibson Dunn's Goodman. "When RiskMetrics sets forth how it is going to vote and bases that on the governance practices companies have in place, companies ignore them at their peril. But who are they to be setting these standards?"

That criticism doesn't reflect reality, counters Patrick McGurn, special counsel to RiskMetrics' ISS Governance Services unit. "People like to pretend that we lead our institutional clients around with a leash. That's simply not the case. Our clients drive our processes. We start our process by seeking input from our institutional clients about their views. Nearly all of our guidelines are written based on a case-by-case analysis. We do include information about company performance, board structure and governance performance."

Greater oversight could quiet critics of RiskMetrics and Glass Lewis, and the SEC is seeking comment on whether regulation is warranted. The SEC has taken a more activist approach to governance than any commission since the Enron Corp. and WorldCom Inc. accounting scandals of the early 2000s. Those scandals not only spawned Sarbanes-Oxley, but helped fuel the rise of activist hedge funds, which saw corporate governance fixes as a means to two ends: winning the support of institutional investors in shareholder votes and ultimately lifting share prices of undervalued companies. Robust M&A in the early 2000s and the increased flow of capital to hedge funds from investors salivating over the prospect of absolute returns -- including institutional investors new to this alternative asset class -- further fanned the activists' flame.

The financial crisis has, of course, propelled the role of boards and balance sheet transparency high onto the regulatory and legislative agendas while damaging both shareholder and stakeholder advocates. Still, some believe the crisis has presented an opportunity for hedge funds and unions to press long-held agendas on issues such as say-on-pay to a sympathetic Obama administration. "A crisis brings about an excuse for reform or legislation," says Gregory Taxin, a co-founder of Spotlight Advisors LLC and a founder of Glass Lewis. "I don't think the financial crisis can be blamed on pay packages. ... [It]'s a convenient solution."

Say-on-pay is included in the House-approved financial reform bill, and the Obama SEC has adopted disclosure rules about director qualifications and the relationship between compensation and risk. The agency has also eliminated broker discretionary voting in director elections. Some have predicted that some form of proxy access, which would give shareholders that have held a threshold level of stock for a certain period of time the ability to submit director nominees on the company proxy card, will be finalized in 2010.

Perhaps. What's more certain is that the argument over shareholders and companies will continue, percolating through the complex network of institutions. After all, it's a truism of all governance questions that any measure of success or failure is completely subjective. There's no way to test whether the shareholder model or the stakeholder model provides the complete range of desirable outcomes for a bewilderingly diverse collection of interests.

What is clearer is that corporate governance as an institutional-building exercise has been a rousing success. The evidence: the astounding growth and proliferation of the corporate governance complex, which like any burgeoning bureaucracy takes on a life of its own. As Latham & Watkins' Nathan says, "You can never say we won. Life is good. If you do, you're out of a job."

Berle and Means might not be thrilled by the results their seminal insights have had and they would certainly sense that they were cited more often than read. But they would certainly be impressed by how big and complicated the industry they all but started has become.

Table of contents

Strong views: The lawyers

By Suzanne Stevens

Millstein and Lipton are at opposite ends of the spectrum, but a middle ground has also emerged
 

Practice meets theory: Academia

By Suzanne Stevens

Bebchuk leads a group of academic-practitioners. But the story doesn't end there.

A matter of alignment: The activists

By Michael Rudnick

hedge funds aim for direct intervention, some are kindler and gentler than others.
 

Hobbled giants: Institutional investors

By Michael Rudnick

Recognizing their limitations, pension plans and unions push for majority voting rather than proxy access.

Policy, politics and regulation

By Suzanne Stevens

Congress is reaching into boardrooms most forcefully on executive compensation.

Weil, Gotshal & Manges LLP has built a powerhouse corporate governance practice on the reputation of Ira Millstein, who in 1994 helped General Motors Corp. draft one of the first sets of public company guidelines outlining governance best practices. Soon after, pension giant California Public Employees' Retirement System, another Millstein client, mailed the guidelines to its 350 members. "That was when the gospel really began to spread," says Millstein.

Millstein continues to practice at Weil but preaches his gospel of shareholder democracy at his namesake Millstein Center for Corporate Governance and Performance at the Yale School of Management. Continuing the Millstein tradition at Weil is governance attorney Holly Gregory, whose clients include TIAA-Cref, Tyco Electronics, Yahoo! Inc. and UnitedHealth Group Inc. She lectures extensively on governance topics and has helped organize governance programs for the Securities and Exchange Commission and the World Bank. Rounding out Weil's governance team are former Delaware Supreme Court Chief Justice E. Norman Veasey and Ellen Odoner.

Martin Lipton and his elite force of like-minded attorneys at Wachtell, Lipton, Rosen & Katz have planted their flag firmly in the camp of management and boards, and profited from it enormously. Lipton's invention of the poison pill in 1982 to help companies beat back hostile bidders is universally recognized as a landmark moment in corporate law. Since then, Wachtell has become a go-to firm for corporations fighting hostile takeovers, shareholder activist campaigns and other governance-spawned challenges. Indeed, Wachtell's success as a firm soared as the prevailing shareholder model grew ever-more ubiquitous.

Lipton's client notes have long been famous, and his partners are steeped in his school of thought. Theodore Mirvis writes extensively on corporate governance and lectures at the Harvard graduate schools of business and law. William Savitt, who co-wrote a 2007 article with Lipton titled "The Many Myths of Lucian Bebchuk" -- a swipe at the Harvard Law professor's views on shareholder democracy -- advises Wachtell clients on proxy contests, shareholder class actions and regulatory enforcement actions relating to mergers and acquisitions.

Gibson, Dunn & Crutcher LLP is another firm with deep roots in governance. John Olson, founding partner of the firm's Washington office, is among governance practitioners as intellectually influential as Millstein and Lipton. He has led or sat on governance committees of the American Bar Association, the Federal Bar Association, the New York Stock Exchange and the American College of Investment Counsel. Today he co-chairs Gibson Dunn's corporate governance practice with Amy Goodman, another prominent governance attorney.

If Millstein and Lipton are on opposite ends of the shareholder rights' spectrum, Goodman falls somewhere in between. As an SEC official from 1976 to 1987, Goodman helped implement some of the earliest governance rules regarding corporate committee disclosure. These days, she's inched closer to the Lipton camp and is more concerned with over-regulation and the speed at which Congress and the SEC are moving to adopt new rules in the wake of the financial crisis.

"I don't think we've thought through some of the governance issues. Proxy access, for example, is very controversial," says Goodman. "Everyone seems to agree that one of the causes of the financial crisis was undue focus on the short term. Proxy access would exacerbate that, because if directors are going to face more election contests on an annual basis, their motivation is to keep the stock price up, which forces a short-term focus."

Latham & Watkins LLP may not have a governance icon in-house, but the firm has a strong governance practice and it's got Charles Nathan, co-chair of the American Bar Association task force on shareholder proposals and a skeptic of shareholder rights, whose comments must set the blood of democracy advocates boiling. "Frankly, the more I looked at corporate governance, the less I thought was there," says Nathan. "You can analogize it to [Catholicism]. You can't prove there's a God, but, by golly, good Catholics believe it. Corporate governance has many of the same attributes. You can't demonstrate it has anything to do with how corporations function as economic models. But, by golly, people believe it."

The Harvard Law School Program on Corporate Governance brings together leading thinkers on all sides of the shareholder rights divide. Its 2009 roundtable on proxy access attracted Delaware Court of Chancery Vice Chancellor Leo E. Strine Jr.; senior Securities and Exchange Commission adviser Kayla Gillan; Dean Shahinian, senior counsel for the Senate Committee on Banking, Housing and Urban Affairs; and AFL-CIO associate general counsel Damon Silvers, among others.

The program is best known, however, as the base of Harvard Law professor Lucian Bebchuk, a prolific researcher, writer and occasional investor activist. Bebchuk sports a near-perfect record on a flurry of bylaws he proposed in 2007 and 2008 at companies including Home Depot Inc., FedEx Corp., Safeway Inc. and CVS Caremark Corp. "It's very useful for academics to be more exposed to issues of practitioners and for practitioners to be exposed to empirical research that can resolve some issues they wrestle with," he says.

Bebchuk's activism, particularly on pay, has been buoyed by the Harvard Law School corporate governance blog he co-founded in 2006 with Strine, who has written and spoken extensively on his own nuanced, and hardly Bebchukian, views on governance. The site has become the leading online hub for lawyers, academics, practitioners, regulators and others, many of whom regularly contribute. Wachtell, Lipton, Rosen & Katz's Martin Lipton and his partners often post on the site.

Ensconced 3,000 miles away at Stanford University is Beb­chuk's frequent sparring partner Joseph Grundfest, who co-directs the school's Directors' College and founded the Stanford Securities Class Action Clearinghouse, which provides online information about securities fraud litigation. Grundfest -- a frequent contributor to Harvard's blog -- often opposes Bebchuk on issues such as proxy access. The former SEC commissioner (1985 to 1990) says it's likely activist investors will run candidates as a way to get attention for their agendas, which is why he isn't surprised that access is an SEC priority. "Lots of people say Democrats are politicizing the process. Well, in Washington, everybody politicizes everything," he says. "When Republicans control the White House, the corporate side of the story tends to be dominant. When Democrats control the White House, the side of the story that's more aligned with unions and state pension funds tends to predominate."

Back on the East Coast, the Millstein Center for Corporate Governance and Performance at the Yale School of Management brings together governance academics, executives and investment managers to conduct research and disseminate work to policymakers and practitioners. "I wouldn't say we're out there beating the drum for anything in particular. We want to keep the subject of corporate governance alive," says the center's namesake, Weil, Gotshal & Manges LLP's Ira Millstein. "What we're trying to do is focus on what are the problems and how do we go about solving them," he says.

The financial crisis introduced new problems, admits Millstein, and spotlighted the challenges boards face in overseeing management and mitigating risk. "It has to do with being too complex. I believe some boards of these financial services companies wanted to know what the risks were and tried very hard to find them. But either they didn't come up to their level, or they were using outmoded formuli, and they didn't have their hands around the whole thing."

As director for the University of Delaware's John L. Weinberg Center for Corporate Governance (named for Goldman, Sachs & Co.'s Weinberg), Charles Elson has a front-row seat on Delaware jurisprudence. Elson recruited Delaware Supreme Court chief justice Myron Steele and Chancery's William Chandler for the center's advisory board; they join AFSCME corp gov director Richard Ferlauto and National Association of Corporate Directors CEO Ken Daly. A lawyer long active on board issues (of counsel at Holland & Knight), Elson gained prominence in the 1998, when as a Sunbeam Corp. director he helped sack CEO "Chainsaw" Al Dunlap.

The contributions of a less-visible, less-activist group of researcher academics are no less meaningful. A prime example: Bebchuk's Harvard colleague and former Columbia Law School professor Mark Roe, who teaches bankruptcy and corporate law. Roe has written extensively on Delaware law, finance and politics over two decades. His objective is not to prove or disprove some piece of doctrine but to study outcomes of rules and regulations. "Much more often than we usually think, the legal outcomes come from the political muscle behind interest groups and public opinion," he says. "Whether it's good governance or bad governance often isn't determinative."

Institutional investors often view activist hedge funds as short-term agitators. "Because they can take concentrated stakes and their time horizons are three to five years, they tend to be more interested in pushing for board seats and transactions as opposed to longer-term corporate governance objectives," says Brandon Rees the deputy director of the office of investment at the AFL-CIO.

On the other side, activists argue that they take the kind of direct action pensions and unions eschew. The real source of friction: Activists may seek outcomes, like the sale of all or part of the company, that can create disruption or job losses. In short, there's always the possibility of a misalignment of interests between the two groups. And hedge fund activists come in every shape and color, from the often spectacular aggressiveness of Carl Icahn to the kinder, gentler approach of, say, a Ralph Whitworth.

Whitworth's Relational Investors LLC is found on the list of fund managers in California Public Employees' Retirement System's nearly $7 billion corporate governance activist fund. His $6 billion activist fund was launched in 1996 with a $200 million CalPERS investment.

While many of his peers are what Whitworth calls "event driven -- they serve as a catalyst to cause a certain event such as a spinoff or takeover," Whitworth says most of his campaigns are "lower profile," involving a longer-term governance and operational focus with "little shakeup." But it was a confrontational campaign that led to the ouster of Home Depot Inc.'s CEO, Robert Nardelli, in early 2007 that helped to cast Whitworth into the spotlight.

Nardelli more than doubled Home Depot's bottom and top lines over five years. But Whitworth argued that the growth was coming from "lower return opportunities," including a noncore supply business. "Nardelli grew the hell out of earnings and revenues, but did it without regard to cost," he says. Nardelli ultimately stepped down after coming under fire for the size of his pay package.

As president of T. Boone Pickens' seminal United Shareholders Association from 1986 to 1994, Whitworth was an early proponent of proxy access and lobbied the Securities and Exchange Commission for reform. Rules for proxy access have yet to be finalized, but Whitworth has had at least one notable success along the way. While chairman of Apria Healthcare Inc. in 2000, he worked to amend its bylaws to include proxy access, and he claims that it's the only public company to have that bylaw provision.

Advocates of proxy access preach it will lower barriers to entry for dissident director candidates by eliminating some proxy contest costs. But not everyone agrees. Gregory Taxin, co-founder of Glass, Lewis & Co. LLC and now a managing member at Spotlight Advisors LLC, insists that most of the money spent is "beyond just ink and mailing, which proxy access would eliminate." Steep costs associated with hiring proxy solicitors and legal fees are not addressed by proxy access.

One provision contained within proposed proxy access rules that Taxin backs is the "universal proxy card," which allows shareholders to choose individual candidates from both incumbent and dissident slates rather than having to elect one slate or the other. But until a universal proxy card rule is established, the best dissidents can offer shareholders in terms of a pick-and-choose option is running a "short slate" of candidates.

Richard Breeden of Breeden Capital Management LLC can be thanked for this measure. It was during his run as chairman of the SEC from 1989 to 1993 that the commission established the "short slate" regulation, allowing shareholders to contest individual board seats rather than running a full slate. Breeden took advantage of this rule in his successful campaign at Zale Corp. in 2008.

Taxin's Spotlight partnered with hedge fund Clinton Group Inc. in late 2009 to take aim at Red Robin Gourmet Burgers Inc., which despite lackluster returns, paid its top officers more than the median for 33 similarly sized companies, according to Hedge Fund Solutions LLC. Taxin argues that the board's plurality voting system "did not create the imperative to do something" about it.

With the threat of a proxy contest looming, Red Robin agreed to recommend that shareholders vote at the 2010 annual meeting to adopt majority voting, form a CEO search committee and appoint four new directors. The stock now trades at near $26, up about 45% from the start of the year.

Over at James Mitarotonda's decade-old hedge fund Barington Capital Group LP, chief operating officer Jared Landaw says the fund takes a "pragmatic view of governance" rather than a "check the box" approach in which popular governance issues like majority voting or say-on-pay are pushed on companies as a one-size-fits-all solution. Barington's successes include plastics company A. Schulman Inc., whose board ofdirectors, which was firmly entrenched thanks to a plurality voting system and staggered elections, sat idle as its North American division lost money.

In 2005, the company named Mitarotonda and David Birney, former president and CEO of plastics company Solvay America Inc., to the board. The once unprofitable North American unit recently recorded a $200,000 quarterly profit, the board has since been declassified, and the company has adopted majority voting.

That's how it's supposed to work.

The heavily indexed, long-term nature of institutional investors prohibits them from doing "the Wall Street walk" -- that is, selling -- when stocks underperform. One of their few options: agitate for governance measures and hope things improve.

Institutions like pension funds and unions thus rely heavily on moral suasion and public relations. It's impossible to judge results, though it is clear institutional clout is far less than the size of its total assets would suggest. And institutions are at the center of the charge that most shareholders don't monitor boards or managers effectively.

Some pension funds have bigger megaphones than others. The biggest is the California Public Employees' Retirement System, or CalPERS, America's largest public pension fund, with $210 billion. The "vast bulk" of CalPERS' assets are managed in-house, which means it can keep closer tabs on governance than many of its peers, says Anne Simpson, its senior portfolio manager for corporate governance. Simpson took charge of CalPERS' governance program in 2009 after serving as first executive director of the International Corporate Governance Network, an organization across 45 countries that seeks to raise governance standards globally.

CalPERS has a staff of 61 to "sift out serially underperforming companies in its portfolio" and analyze whether governance improvements could prompt turnarounds, she says. The sheer number of investments prohibits it from vetting them for governance before buying. Instead, she says, "our strategy is to be an active owner within this passive strategy."

CalPERS employs a model in which "we also pick out a particular issue where we think the market needs cleaning up ... a marketwide issue regardless of performance." The issue du jour: majority voting for boards that operate under a plurality system. CalPERS recently examined its top 300 U.S. equity holdings and found 58 lacked majority voting. It wrote to these 58 and may follow up with shareholder proposals.

Majority voting has also been a goal of the vocal New York City pension funds and retirement systems. New York City Comptroller John Liu oversees development of its shareholder proposal programs, proxy voting policies and guidelines. Last year, New York submitted proposals to 32 companies, ranging from resolutions to repeal staggered boards to adopting pay-for-performance standards. The five New York City funds, with some $105 billion under management, submitted six say-on-pay proposals last year: One was adopted by retailer Charming Shoppes Inc. before going to a vote; two others received majority votes.

The California State Teachers' Retirement System, or CalSTRS, the No. 2 public pension fund, with $138 billion, has written to companies with directors who also held board seats at failed financial institutions, requesting an evaluation before they sought re-election, says CalSTRS director of corporate governance Anne Sheehan. The argument that the implosion on Wall Street was tied to short-term incentives -- bonuses -- has sparked say-on-pay proposals. CalSTRS recently developed compensation guidelines calling for longer-term performance structures involving restricted awards and submitted them to 300 of its largest holdings, "which led to a dialogue with 60 companies," she says.

This year, the fund also submitted 21 resolutions, from improving board diversity to requesting that poison pills be put to shareholder votes. CalSTRS also has a $3 billion governance fund invested in activist managers.

Private pension manager TIAA-Cref, which services mostly university employees, is acting now to facilitate a "private market-based solution" for say-on-pay rather than waiting for legislation, says senior vice president and head of corporate governance Hye-Won Choi. The country's largest private pension fund, with some $425 billion, has lobbied its holdings to adopt say-on-pay and "be the first movers on this reform instead of waiting for legislation," she says.

TIAA tends to initiate discussions privately with boards and management before taking the proxy route. "We find companies are much more forthcoming and conversations are broader and more meaningful if the companies know the content will remain confidential," Choi says.

Successes? Choi cites PepsiCo Inc.'s recent decision to voluntarily add a say-on-pay resolution following a TIAA proposal that garnered a "high level of support" but fell short of a majority vote.

Unions generally employ a more public approach. The proof: Public pension funds filed 26 shareholder proposals in the first six months of 2009, while unions filed 122, according to proxy solicitor Georgeson Inc.

Lisa Lindsley, director of capital strategies at the American Federation of State, County and Municipal Employees, or AFSCME, says pension funds' significant stakes allow them "a greater level of access" than unions. Companies may not welcome union governance suggestions in the belief that they hide a collective bargaining agenda, says John Wilcox, chairman of international governance consultancy Sodali Ltd. and TIAA's former governance chief.

Lindsley took control of AFSCME's governance program in March, coming from a similar role at the United Food and Commercial Workers International Union.

Brandon Rees, deputy director of the office of investments of the AFL-CIO, a broad federation of unions whose members participate in union-sponsored pensions worth $4 trillion, faults the failure of risk management committees at the banks for the crisis. After shareholder efforts led by the AFL-CIO and AFSCME, the former chairman of Citigroup Inc.'s audit and risk management committee, C. Michael Armstrong, and most recent committee chair John Deutch stepped down before the 2010 election.

Daniel Pedrotty leads the AFL-CIO effort as the chief investment officer, advising union-sponsored pension plans. The union federation filed 17 shareholder proposals in the first half of 2009, from declassifying entrenched boards to say-on-pay, and this year withheld votes from directors on the health and safety committee of coal miner Massey Energy Co.

Ed Durkin, director of corporate affairs at the United Brotherhood of Carpenters and Joiners of America, or UBCJA, is a relative old-timer in governance. For nearly three decades, he has overseen corporate governance monitoring for North America's largest building trade union. Last year, UBCJA put forth 71 majority voting proposals, more than half of which were settled before being put to a shareholder vote. The union, whose plans hold $40 billion, has recently focused on majority voting, submitting 57 proposals on the matter in 2010, most of which were settled, he says.

Durkin recognizes the limitations of institutional investors. "Public pension funds, for all of their talk, don't do that many proposals," he says. Proxy access is "a tool that doesn't fit the big institutional investors, whereas majority voting does."

The strictures of corporate governance have traditionally been a combination of company bylaws, Delaware case law, federal law and Securities and Exchange Commission disclosures. Given the depth of the financial crisis, it's no surprise that the latter two are rethinking the federal rules that govern board oversight and risk management. Congress is reaching into boardrooms most forcefully on executive compensation. Although plenty of politicians are masters at pumping up populist rage, Massachusetts Rep. Barney Frank is in a position to do something about it.

The fast-talking, occasionally exasperated Massachusetts Democrat heads the powerful House Financial Services Committee and in December drove through the Wall Street Reform and Consumer Protection Act, which includes a "say on pay" provision to give shareholders an advisory vote on compensation. It's Wall Street bonuses, though, that get the Congressman most riled up.

"The notion that the most highly paid people in prestigious institutions, unlike the rest of us, have to not only be compensated but given something extra to do their jobs is offensive," says Frank. "We asked ... Lloyd Blankfein, Ken Lewis at the time, Vikram Pandit, Jamie Dimon, 'What is it that you now do on the job that you would stop doing if you didn't get a bonus?' They all said, 'Nothing.' "

Frank isn't going after the bonus system per se, but the House bill does enable regulators to ban compensation packages at financial institutions that they believe encourage undue risk.

SEC Chairwoman Mary Schapiro isn't as voluble as Frank, but she has been just as busy. In just over a year, the agency has adopted new disclosure rules about board leadership, director qualifications and risk oversight. Some form of proxy access, which would allow shareholders who meet minimum standards to include director nominees on the company's proxy, at the company's expense, is likely to be approved this summer.

Driving change alongside Schapiro is senior adviser Kayla Gillan, who spent 16 years as general counsel for the California Public Employees' Retirement System, was a founding member of the Public Company Accounting Oversight Board in Washington and spent a year as chief administrative officer at powerhouse proxy advisory RiskMetrics Group Inc. Those activist roots align perfectly with the Obama administration's preference for shareholder access.

In Delaware, Court of Chancery Vice Chancellor Leo E. Strine Jr. has become a force in corporate governance. Strine, who has over the years argued that Delaware should grant proxy access to preserve its corporate law franchise, is a regular at industry conferences and co-founder of the Harvard Law School corporate governance blog with Lucian Bebchuk.

Strine's own views on access are more complex. On one hand, Strine the judge operates within Delaware law, which tries to define the limits of board and shareholder powers, particularly when it comes to M&A. But Strine the commentator has been skeptical about aspects of the governance orthodoxy, from differences in self-interest among shareholders to the intense focus of activists on hot-button issues like poison pills or staggered boards. Strine has often pointed out the tendency of the governance establishment to emphasize problems that it can then solve. And, he writes, Americans have been forced to plan for retirement as long-term investors, almost always through institutions. Many of these institutions operate on shorter-term time horizons and are often opaque, creating a systemic issue for shareholder democracy.