The effort by three union pension funds to stop a proposed change in the AT&T Corp. charter, making it easier to break up the company, illustrates critically important questions for the future of corporate governance in the United States - even though the union funds last week dropped their lawsuit against the company in exchange for a dialogue with management about the proposed restructuring.
AT&T, or Ma Bell, has for more than a century personified the acceptable face of capitalism. Operating as a legal monopoly for most of that period, Ma Bell seemed to incarnate all of the favorable characteristics - state-of-the-art research, reliable service, reasonable costs, attention to community service, as well as being able to boast it "never missed a dividend." The board of directors of AT&T was America's House of Lords.
But many former government and monopoly companies have found it difficult to succeed in a competitive environment. Ma Bell, like its counterpart in the United Kingdom, British Telecommunications PLC, has had a particularly unfortunate record.
During the 1980s, when much of American industry was "purified" by the pressures of hostile takeovers, a few of the largest companies that by virtue of size were immune from threat did not experience the pressure to be accountable to shareholders. AT&T has been so large for so long with so many shareholders, none of whom owned more than 1% of the total, that the whole concept of being responsible to ownership is foreign. It shows.
AT&T has committed more than one "corporate atrocity." At a time when establishment America, including virtually every single member of the AT&T board, bitterly opposed hostile takeovers, Ma Bell proceeded not only to take over NCR Corp., but also ultimately to destroy its value. Was there any accountability for this? Did directors resign? Was Chief Executive Officer Robert Allen replaced? Unhappily, he survived to muck up hiring a successor; and still he stayed. No accountability. The successor was forced out, but Robert Allen was still allowed to exercise power. It is hard to imagine a healthy board permitting this. Ultimately, shareholders have to act, if the board continually proves that it cannot or will not. By the time Michael Armstrong arrived as CEO, this once great company had suffered mortal damage, not only to its business but to its reputation. Won't somebody do something?
Whenever union pension funds act like the company owners they are, immediate objections are raised: "They shouldn't be allowed to negotiate except at the bargaining table." That three union funds had initiated lawsuits and solicited votes against management's proposed charter changes raises an ugly question at the core of American governance failure, "If not them, who?" AT&T shareholders have lost a huge percentage of the value of their investment because of the failure of governance, the absence of accountability by management. Somebody should do something. How about the Ford Foundation? It owns stock in Telephone. Or how about Harvard University? It also is a shareholder. Apart from the obvious problems of conflicts of interests by interlocking fiduciaries, the reality is that only the union funds have raised these critical issues in America in the last 15 years. The AFL-CIO, under the leadership of William Patterson, director of the AFL-CIO's office of corporate affairs, has become a credible and responsible global shareowner in recent years. Meeting with pension fiduciaries from other countries in Stockholm in 1999 and Brussels in 2000, Mr. Patterson has developed allies, an ownership agenda and a reputation for willingness to work with other shareholders. This is a model for other institutions to follow.
Ironically, the law in America is uniquely clear that the trustees of all company employee benefit funds are obligated to protect their beneficiaries' interests - to stop the destruction of values that has occurred for a decade at AT&T - by monitoring management and interceding when necessary. With the lonely exception of TIAA-CREF, not a single private company pension fiduciary has been involved in corporate governance or shareholder activism during the last 20 years.
The irony is that, before divestiture, the largest pension fund in America was that of AT&T; and after divestiture, the Baby Bell pension funds coupled with the parent were still the largest single aggregation of fiduciary capital in the country. AT&T had the authority in the pension fund world to prescribe the extent of fiduciary responsibility for portfolio managers. In other words, because of its size, AT&T could have set the standards of fiduciary leadership and involvement in corporate governance issues. With such leadership coming from AT&T, large corporations would have accorded it a measure of respect. Nothing was done. The supreme irony is that if a culture of shareholder monitoring had been widely established, Ma Bell herself might have been saved.
The union funds did what had to be done. They were entitled to support, particularly in the effort to retain ultimate control over the corporation's destiny. The real question is, Where is everybody else? Where are the foundations, the universities, the mutual funds, the corporate pension and other ERISA funds? Does AT&T have to expire before fiduciary shareholders - who collectively own half of all the outstanding shares in U.S. companies - take on the responsibilities of ownership? Remember Ma Bell!
Robert A.G. Monks, who was administrator of the Department of Labor's Office of Pension and Welfare Benefit Programs from 1984 to 1985, is a corporate governance authority. He is founder of Institutional Shareholder Services, now part of Thomson Corp., and chairman of Lens Investment Management LLC, a shareholder activist firm. Mr. Monks' fifth book, "The New Global Investors," published by Capstone Publishing Ltd., Oxford, England, is scheduled for release this spring.
