Shareholder Meetings: Unearthing the history

By Tanya Mohn

Nearly 400 years ago, angry shareholders of the Dutch East India Company pushed for more rights and accused directors of self-dealing. In 19th century America, stockholders kept a close watch on public companies that operated bridges, canals, banks and especially railroads, which resulted in numerous fights for control.

Not much more is known about the early days of shareholder activity, says Colleen Dunlavy, a professor in the Department of History at the University of Wisconsin-Madison. There is a dearth of documentation, including in companies’ archives.

But there were two key institutional developments in this country. “One of the big changes over the 19th century was the increasing use of proxies and the corresponding decline in in-person attendance at shareholder meetings,” says Dunlavy, whose research focuses on the history of shareholder voting rights.

Attendance — and therefore in-person voting — was more robust before the Civil War. The voting model for business corporations was based on municipal corporations, according to Dunlavy. City residents could not vote by proxy, and neither could early shareholders without explicit sanction in law. Voting by proxy became common after the Civil War, as more companies expanded their geographical reach, although some railroads in the 1850s offered free passes to shareholders to make it easier and less costly to attend, she says.

A second significant modification was the move to cumulative voting, a system that fosters consolidation of votes for better representation. If a shareholder has 100 shares and three directors are being elected, the shareholder — instead of casting 100 votes for each director — may cast all 300 votes for a single director. “By the 1880s, one vote per share was the norm in the U.S.,” Dunlavy said. “Cumulative voting was a modest effort to counteract the dominance of the largest shareholders and push the balance of power back to the small shareholder.”

But it is the last century that has been the most turbulent period for corporate oversight and power struggles between management and shareholders, says Jeff Gramm, author of Dear Chairman: Boardroom Battles and the Rise of Shareholder Activism, which chronicles the evolution of shareholder behavior, highlighted by letters from activist investors like Warren Buffett and Ross Perot. “If no one is paying attention, most boards will act in self-preservation rather than doing right by shareholders,” he says.

A letter written in 1927 by Benjamin Graham, a professional investor, aimed to convince John D. Rockefeller Jr., Northern Pipeline’s biggest shareholder at the time, to distribute the company’s excess capital to shareholders. “The letter ultimately failed,” as Rockefeller did not support Graham’s request, “but he still won the vote,” says Gramm, a move he credits as the birth of modern shareholder activism.

“For most of history, including now, most annual shareholder meetings were uneventful formalities. But they take on a special meaning when a company is doing very poorly,” said Gramm. “If there is no accountability, bad things can happen.”

Shareholders and their meetings in the 1920s were made up mainly of founding partners and strategic investors. It was a group that tended to be engaged. Only the largest railroad companies had diverse shareholder bases.

The first modern public corporations in the United States became recognized in the 1930s, following the great stock market crash of October 1929, explains Alexandra Lajoux, chief knowledge officer emeritus for the National Association of Corporate Directors. In their 1932 book The Modern Corporation and Private Property, Adolf Berle and Gardiner Means noted with alarm a separation of ownership and control in some companies due to dispersion of holdings among many owners, and flagged such corporations as “quasi-public,” in contrast to private companies.

Rules for such “public” entities became enshrined in the Securities Act of 1933 and Securities Exchange Act of 1934, which jointly established the Securities and Exchange Commission, says Lajoux. The main focus of the securities laws and the SEC was to ensure proper communications from companies to shareholders and the annual meeting was an important venue for this transfer of information. 

Section 14 of the Securities Exchange Act, she points out, is entitled Proxies and it regulates annual communications from companies to shareholders in the proxy statement, so named because it enables votes (via proxy) by shareholders who are not at the meeting in person.

“While annual meetings existed before then,” she adds, “the 1934 act and its Section 14 brought discipline to the communications leading up to the annual meeting.” Another milestone occurred in the 1940s, when the SEC passed its first rules mandating inclusion of shareholder resolutions in proxy statements.

By the 1950s, the shareholder base of public companies had rapidly diffused. That decade saw a proxy fight movement, which put hostile shareholders in the public eye for the first time. From the 1960s and continuing until today has been a second period of concentrated ownership, this time by large institutional investors, like pension and mutual funds.

An October 8, 1966 column from The New Yorker provides insight into the time period. John Brooks detailed his experiences attending a number of annual meetings, including one held by AT& T, then the world’s largest company, in “A Reporter at Large: Stockholder Season.” Brooks, who referred to corporate power as making the medieval feudal system look like a Sunday school party, noted that many companies were beginning to hold the yearly gatherings away from headquarters, officially, they claimed, to make it easier for stockholders from other areas of the country to attend. But the real reason, Brooks surmised, was so management could avoid “most of the noisiest dissident stockholders.”

Meetings and shareholder involvement was very hands-off until the 1980s, a period of corporate exploitation during which hostile raiders and management teams sometimes took advantage rather than protected the interests of passive investors, says Gramm, the author who runs the Bandera Partners hedge fund. “Shareholder actions during that time pushed big institutions to really mind their business again.”

But despite notable discord through the years, the fundamentals of annual shareholder meetings have changed little since becoming part of the American corporate fabric and remain true to their Roman-inspired heritage.

“It’s a representative democracy,” an important check and balance between those who run the company day-to-day and investors, says Wei Jiang, a professor in the finance and economics division and vice dean for curriculum and instruction at Columbia Business School. “It’s practically the only opportunity for managers to meet shareholders face to face.”

And the combination of annual meetings and shareholder activism “is a good thing” says Jiang, spawning engagement that challenges companies “to act in their own best interests.”

Tanya Mohn frequently writes about business topics, from personal finance issues to the changing workplace, for a host of publications including The New York Times, Forbes, BBC and NBC News.