Proxy access is a killer idea? For whom?
Lest readers fall asleep about the idea of proxy access, take note of the Business Roundtable reaction.
Business Roundtable voices discontent:
Ivan G. Seidenberg, chief executive of Verizon Communications, said that Democrats in Washington are pursuing tax increases, policy changes and regulatory actions that together threaten to dampen economic growth…
The final straw, said Roundtable president John Castellani, was the introduction of two pieces of legislation, now pending in Congress, that the group views as particularly bad for business. One, a provision of the administration’s financial regulation overhaul, would make it easier for shareholders to nominate corporate board members. The other would raise taxes on multinational corporations. The rhetoric accompanying the tax proposals has been particularly harsh, Castellani said, with Democrats vowing to campaign in this fall’s midterm elections on a platform of punishing companies that move jobs overseas.
The Washington Post reports the importance attached to proxy access:
A rush of chief executives from a wide swath of industries has been coming through Washington over the past three weeks, talking to lawmakers about a long-debated issue called “proxy access,” which would make it easier for shareholders at all publicly traded companies — not just banks — to nominate board directors. Opponents say the rule has nothing to do with overhauling Wall Street and doesn’t belong in the legislation.
“This is our highest priority,” said John Castellani, president of the Business Roundtable, which represents 170 chief executives. “Literally all of our members have called about this.”
Advocates for shareholders’ rights, including unions and institutional investors, say the crisis on Wall Street had everything to do with corporate boards failing to do their jobs.
With proxy access, shareholders would be able to send a strong message to management if they weren’t happy with a company’s strategy, for instance, in managing risk or charting growth. On the other side, public companies fear that proxy access will mainly invite activist investors and hedge funds to infiltrate boards and topple existing management — whether out of displeasure with how a company is run or to pave the way for a hostile takeover.
The end result, corporate executives warn, is that board directors will feel constant pressure to juice up their company’s stock price and put short-term considerations ahead of the firm’s long-term health…
While of course not true for all businesses, I thought that 2005 to 2007 were especially good years for stock price pushing and short-term health advocates without the help of proxy access, for instance. And I haven’t even emphasized MSN taxes! Which I will later.
Update: Hat tip Naked Capitalism for this link to Don’t gut proxy access by Lucien Bebechuk from Harvard University.
The primary purpose of a proxy-access reform is to facilitate increased involvement by long-term institutional investors that have “skin in the game” but not a big block of shares. Consider, for example, the asset manager TIAA-CREF, a long-term investor holding on the order of half a percent of the shares of many large public companies. Because such an investor would be able to capture only a very small fraction of the benefits of improved governance, it cannot be expected to undertake a costly proxy solicitation even when it believes that replacing directors would significantly enhance firm value. But if this investor could place a director on the ballot, it might do so when it views governance as especially poor. And the ability of such institutional investors to do so might make boards more attentive to shareholder interests in the first place.
Under the S.E.C.’s proposed rule, the ownership threshold would be 1 percent for large companies. While such a threshold would serve as a meaningful screen, limiting the use of proxy access to special cases, involvement by such institutional investors would remain viable. Moreover, without the proposed legislative limit on its authority, the S.E.C. would be able to lower its initial threshold if it proved too burdensome.
With a hard-wired legislative threshold of 5 percent ownership, however, the proxy-access provisions would be largely practically irrelevant for such long-term institutional investors. Even if all the 10 largest public pension funds hypothetically banded together – a concerted action that would involve overcoming significant coordination costs and collective action barriers – they would commonly fail to reach the 5 percent threshold. For example, data put together by Calpers, the giant California state pension fund, indicates that the 10 largest pension funds hold less than 2.5 percent at Bank of America, Microsoft, I.B.M. and Exxon Mobil; even if all these funds joined forces, they would still have less than half of the amount needed to reach the 5 percent threshold.
Oh No! Democracy coming to a corporation near you, can’t have that it’s un-American. That means the incestuous relationship could be broken leading to contamination of the lineage!
Though in Germany, they go even further. Labor has seats on the board. (Ahhhhhhhhhh, not labor?!)
German unions have played a greater role in management decisions through participation in corporate boards and co-determination
As a condition to obtain the legal status of a trade union, employee associations need to prove that their leverage is strong enough to serve as a counterforce in negotiations with employers.
Within the German corporate governance system, employee representation on the supervisory board is typically legally mandated. We propose that such representation of labor on corporate boards confers valuable first-hand operational knowledge to corporate board decision-making. Indeed, we find that labor representation provides a powerful means of monitoring and reduces agency costs within the firm. Moreover, we show that the greater the need for coordination within the firm, the greater the potential improvement there is in governance effectiveness through the judicious use of labor representation.
An area of inquiry unaddressed in much of the extant corporate governance literature is
the role of stakeholders beyond the shareholders. In the Anglo-American system, the fundamental
objective of corporate governance is the optimal imposition of incentives and control to maximize
the return on equity capital in face of the separation of ownership and control (Shleifer and
Vishny (1997)). In other countries—e.g., Germany and Japan—a broader view of corporate
governance is often taken. The interests of creditors, employees, customers, suppliers,
government, etc. and the conflicts among these other stakeholders are considered (Hoshi (1998)
and Schmidt and Tyrell (1997)).
Excellent and relevant info. But as you say… to consider “the interests of creditors, employees, customers, suppliers, government, etc. and the conflicts among these other stakeholders ” ??
“We’re all in the same boat” has limited, if any, meaning where most people are adrift in leaky skiffs or treading water and praying. The concept of a big shared boat is obviously dangerous to yacht owners.
The management clearly likes the soviet style of elections corporations run because corporations are all little soviet unions. Recall that on a soviet election you could vote da or nyet. Until very recently all one could do is vote for a director candidate or withhold the vote. If a candidate got 1 vote the candidate was elected. Recently the requirement is that a majortity of the votes cast be had.
It seems to me that if a majority of the owners of a company want to run it into the ground is that not their right. (Practically speaking it can’t happen since most stock is held by institutions and they are required to vote in the interest of their shareholders, and running a company into the ground is not in the overall interest of the shareholders of a mutual fund in most cases).
I’m not sure that bondholders should get votes, but anything that makes the owners responsible for the company is a good thing. Clearly “incentivizing managment to align its interests with those of shareholders” hasn’t worked in American business.