That clearinghouse of governance chatter, the Harvard Law School Forum on Corporate Governance and Financial Regulation, offered up a report Tuesday that would seemingly be of interest to only the most devoted of governance geeks: a report from the $400 million in assets Nathan Cummings Foundation. Now that's a way to attract traffic, eh? Still, beneath the handsome design and smooth-running prose, the NCF's "Changing Corporate Behavior through Shareholder Activism" does offer a window into the perplexities of current governance orthodoxy. Besides, I've read it now, so I'll summarize while you kick back.

The NCF's essential argument is that foundations should use their considerable assets as another tool to advance whatever mission they're pursuing. There is, in that statement, a kind of complacency; the NCF seems to assume that its mission, in broad terms in favor of "environmental, social and governance (ESG) issues" is shared by most everyone else and is, in some form or another, a repository of inarguable truth. Now the NCF isn't stupid. It acknowledges there are problems for many foundations seeking to use tools of shareholder activism. First, there's the core governance problem. Investors can sell shares when they're not happy, but in doing so they also surrender influence. And many large investors, which are indexed, can't sell. That leaves "voice," in the famous essay by Albert O. Hirschman, "Exit, Voice & Loyalty." You can hang around and try to browbeat the company, agitating for shareholder resolutions, and then campaigning for votes. But while the NCF suggests this is cost effective, it's actually labor intensive and long term. Indeed, when the NCF describes its campaigns on issues like executive compensation and climate change, some of its electoral results are embarrassingly tiny past the fact that it gets to air its concerns in a resolution (its resolution for a pay review at Goldman, Sachs & Co. got 5.5% of the votes, but, the report crows, plenty of press). In short, despite its belief that these issues will contribute to long-term shareholder value, the NCF has, with a few exceptions, struggled to get much support from fellow shareholders.

A core belief of the NCF is that pressing ESG issues will create long-term shareholder value. "Numerous scholarly articles and a growing number of investment houses support the notion that many of the issues pursued by activist investors through shareholder actions have very real implications for long-term shareholder value." This is the core argument of the governance rump: that companies that practice "good" governance attain higher valuations than those defined as "bad." Alas, this sometimes smacks of faith as much as empirical certainty. "Although the specifics of the ways in which each of these individual governance provisions affects corporate values are somewhat complicated," confesses the report, "the general idea is that firms with better governance structures will have managements that pursue policies and actions that will enhance shareholder value over the long term."

There's a lot going on in those statements. First, the NCF assumes that its interests and those of other "activist investors" are aligned. Given that activist investors can range from Carl Icahn to Bill Ackman to the local hedge fund to the NCF itself, that's a radical simplification. Second, the NCF seems to conflate good governance practices -- staggered boards, properly structured incentive programs -- with the kind of ESG issues it pursues. And so it comes to assume that ESG issues will result in long-term gain. Now, in fact, these issues to many may seem to be sensible -- hammering excessive pay, demanding greater transparency on climate issues or political contributions, seeking better healthcare -- and even contributors to long-term value creation. But the very nature of "long term" suggests that much can go wrong or change between now and then. And issues pursued over the long term are fighting upriver against a very powerful current: Most investors appear to be increasingly short term, even if they never sell. The NCF's assumption, in short, that long-term value creation is sought by shareholders may be right in the aggregate, but wrong in individual corporate situations.

Lastly, there's a contradiction lurking within this program of shareholder activism. The very evolution of modern corporate governance, with its emphasis on the shareholder as owner and monitor, represents a shift that essentially tracked the rise of free-market economics to dominance. While the efficient-market hypothesis is widely derided these days, few have tried to bring back stakeholder governance, despite overwhelming evidence that shareholders were at least complicit in many of the excesses that were part of the financial crisis, including executive comp and too much leverage. The only way to jive the shareholder-as-monitor and the financial crisis is to suggest that shareholders were kept in the dark about issues like pay and leverage (NCF resolutions often emphasize transparency); and the knee-jerk solution is to give shareholders even more power to set corporate agendas, thus creating greater shareholder-centrism. Those are, at best, questionable assumptions.

The real problem with all this is that shareholders, on a company-by-company basis, are not thinking long term at all. Indeed, investors have shortened up their time frames over the last few decades even as shareholder hegemony was tightening its grip, forcing companies to manage on a quarter-by-quarter basis that the NCF would undoubtedly view unhappily. The real issue here may not be to reform the practices of corporations, it's to somehow convince the real powers that be, institutional shareholders, that they should buy and hold and manage for the long run. Until that occurs, we'll be seeing more reports like this arguing for patience and the emergence of rational long-term value, some day, some how, some way. - Robert Teitelman