The Weinberg Center, based at the University of Delaware, marked its 25th anniversary by arranging for the publication of Boardroom Legacy: The Weinbergs of Goldman Sachs and the Evolution of Corporate Governance. The focal point for this publication is ‘“Status and Functions of Corporate Directors’,” a 1948 Princeton thesis by John L. Weinberg (JW), head of Goldman Sachs from 1976 to 1990, together with a 1933 memorandum and a 1949 speech by JW’s father Sidney Weinberg (SW), who himself led Goldman Sachs for nearly 40 years. The Weinberg Center invited contributions from numerous corporate governance commentators to round out the Boardroom Legacy volume, and this post is based on the chapter I submitted in response to this invitation.
JW’s 1948 senior thesis, SW’s 1933 memorandum and SW’s 1949 speech each focus on directors. Shareholders have a supporting role in both JW’s 1948 thesis and SW’s 1949 speech. In my paper I supplement and contextualize what JW and SW said about shareholders. One of two ways I do this is by engaging with their analysis of what is now often referred to as ‘“corporate purpose’.”
JW and SW, in discussing the duties of mid-20th century directors, did so in a manner aligned with what is referred to presently as shareholder primacy, acknowledging that directors were obliged to prioritize the stockholders’ interests. I point out in my chapter that their assessment of corporate law’s treatment of director priorities squares up with mid-20th century jurisprudence on corporate purpose. At the same time, though, JW and SW envisaged a role for directors more substantial than merely serving the interests of shareholders, maintaining in so doing that directors had socially grounded responsibilities to key corporate constituencies and the public at large. JW and SW’s analysis accurately anticipated a shift in how those running companies thought of what they were doing, foreshadowing corporate purpose trends oriented around what is commonly referred to as ‘“managerialism’”. From the 1950s through to the end of the 1970s it was widely assumed in corporate America that in practical terms shareholders were merely one constituency among a number those running public companies should and would take into account.
How did those running corporations in the managerialist 1950s, 1960s and 1970s have the scope to pursue a stakeholder-friendly managerialist agenda given that the relevant jurisprudence indicated that corporate law principles directed boards to prioritize shareholders? The law on directors’ duties did not change, and remained shareholder-focused. Nevertheless, it became increasingly evident during the managerialist era that those running companies had substantial scope practically to cater for constituencies other than stockholders. This was most obvious with corporate charitable contributions, which were taboo under corporate law during the opening decades of the 20th century but had been fully legitimized by statutory reform and case law developments by the end of the 1950s. Also, due to the operation of the business judgment rule, the managerialist era judiciary afforded directors substantial discretion to forsake delivering immediate benefits to the shareholders. A dearth of litigation on point would have reinforced the idea boards had little reason to fear that a failure to prioritize shareholders would be adjudged a breach of duty.
The second way in which I contextualize what JW and SW said about shareholders is by discussing the potency of shareholder pressure on boards during the period when they were discussing directors. JW and SW both suggested that mid-19th century shareholders were at the center of the action with the corporations of that era, but assumed mid-20th century shareholders were a corporate sideshow. In the 1980s, a hostile takeover wave pushed shareholders up the priority list of public company executives. In the 2000s, robust activism by a subset of hedge funds reinforced shareholder primacy in American boardrooms. To what extent might similar forces have motivated directors to prioritize shareholders at the time JW and SW were discussing boards? To address this question, in my chapter I draw on a hand-collected proxy contest dataset based on newspaper searches covering from 1900 to 1949 I have relied upon in certain respects in previous research with John Armour.
With the proxy contest dataset, the 1940s was the decade when activism was most prevalent, involving 113 proxy contests, or just over two-fifths of the 1900-49 total of 279. The surge in activism incidents in the 1940s was most pronounced as the decade drew to a close, when JW and SW were commenting on boards. Those familiar with the history of shareholder proposals might plausibly hypothesize that a regulatory change explains the pattern. In 1942, the SEC promulgated the forerunner to Rule 14a-8, which currently provides the platform for hundreds of shareholder proposals annually. Given the present pattern, a logical supposition is that the 1942 change contributed substantially to the late 1940s proxy contest surge. This apparently was not the case.
As is the case with Rule 14a-8, with its 1942 forerunner the right to make a shareholder proposal did not extend to director elections. Correspondingly, if the 1942 reforms were the catalyst for the increase in the number of proxy contests in the dataset in the late 1940s, the proportion where there was no attempt to secure a board seat should have been markedly higher than it was for the full dataset. There was no such pattern. As was the case with the dataset in its entirety, only a small minority of the late 1940s proxy contests did not involve director elections.
In terms of proxy contests where directorships were at stake, in both the late 1940s and the proxy contest dataset as a whole, it was much more common for activists to seek to carry out a de facto takeover by securing full board control rather than merely attempt to obtain representation on the board. When shareholder insurgents sought to carry out a takeover by way of a proxy contest, there was a realistic prospect of success. Of the 46 proxy battles in the dataset from 1947, 1948 and 1949, 30 involved attempts to secure board control. With these 30, the protagonists prevailed on 13 occasions and in five instances achieved partial success in the sense they attained some board representation.
Proxy battles with a board dimension typically would have offered greater drama for newspapers than shareholder activism lacking a board representation angle. Correspondingly, board contests, and particularly de facto takeover attempts, likely are over-represented in the proxy contest dataset as compared with proxy battles where directorships were not at stake. Regardless of board control over-representation compared with other types of proxy contest, when JW and SW were commenting on boards proxy contests underpinned what is commonly referred to as the market for corporate control. The market for corporate control is often associated with takeover bids involving tender offers to buy shares but these were a rarity until at least the 1960s.
SW said nothing about director elections in his 1949 speech and JW referred in his 1948 thesis to the board as a self-perpetuating body where directors determined who served despite shareholders formally choosing. Given the director-selection related proxy contests my chapter describes, JW and SW’s take on mid-20th century shareholder/board dynamics was insufficiently fully rounded. A key caveat is in order, though.
In the late 1940s, there were well over 4000 companies with shares listed for trading on national exchanges in the United States and numerous additional firms had shares traded ‘“over-the counter’.” Correspondingly, despite proxy contests involving potential changes of corporate control occurring during these years, the odds were stacked heavily against a particular company becoming embroiled in a takeover-related proxy contest. Given this, for JW and SW not putting shareholder engagement front and center when they were talking about boards was a fully defensible choice. This is particularly the case because they accurately noted that corporate law put directors under an onus to run companies in the interests of shareholders and correctly anticipated what would soon become three decades’ worth of corporate ‘“managerialism’” in corporate America where directors had substantial regard for constituencies other than shareholders. Ultimately, revisiting JW and SW’s analysis of boards is a highly worthwhile endeavour even if those specifically interested in the position of shareholders in mid-20th century corporate America should look beyond what JW and SW said.
The full paper can be accessed here.
Brian R. Cheffins is a Professor of Corporate Law (S.J. Berwin) at the University of Cambridge.
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