The completely predictable caterwauling over the proxy access decision by the SEC has already begun.
“The tensions over proxy access may tarnish Mr. Cox’s image as a self-proclaimed investor advocate,” the Wall Street Journal’s Kara Scannell claims in an article the editors of the Journal headlined as “Cox Puts Legacy On The Line.”
We’ve said again and again that the so-called “proxy access” reforms were a bad idea. In the first place, this kind of corporate governance is best left to the states. What’s more, far from increasing the power of ordinary investors the move would have left them vulnerable to exploitation by special interests, especially union dominated pension funds.
If you’ve been reading DealBreaker, you know that we’ve covered this topic at length. And so it is, well, annoying to read news articles that claim that it somehow runs counter to being an investor advocate to reject increasing the franchise of shareholders. It’s not just proxy access; similar claims are made for ‘say on pay’ proposals, as well. In truth, these proposals made in the name of shareholder democracy are a special-interest power grab wrapped in a canard.
The canard is that shareholders have an interest in companies being more democratic. The cause of shareholder democracy sounds nice because we’ve all been taught that democracy is a good thing, shareholders are owners of companies and corporate boards are conflict ridden old boys clubs. But most of the arguments for shareholder democracy wither in the presence of thought.
In the first place, it’s deceptive to say that investors are the “owners” of companies. It’s more accurate to say that they own a fractional share entitling them to certain rights that are spelled out in the corporate charters of the companies they invest in and the laws of the jurisdiction where the companies are formed. Their ownership is restricted by the rights of other shareholders, as well as various creditors. Even as a collective body, they do not own the company in fee simple.
What’s more, few shareholders have a subjective interest in board member elections, except during extreme cases of corporate failure. One sign of this is that when given the opportunity, shareholders rarely act to reject company proposed directors. This is completely rational on their part because diversified shareholders lack an incentive to become overly familiar with the operations of corporate boards. Because they own a diversified portfolio of investments, their interest lies in a prosperous economy and a rising stock market rather than the governance of individual corporations. They rationally care about the big picture rather than the operation of individual companies.
And that brings us to the special interest power grab. The rational ignorance and apathy of ordinary investors produces the entirely predictable effect of rendering them vulnerable to special interest exploitation. Agency costs of self-serving managers are a now familiar example of this. And because of our long-standing familiarity with managerial agency costs, we’ve developed various corporate structures, reward incentives and legal frameworks aimed at better aligning investors and managers.
Less familiar—and therefore more dangerous—is exploitation by groups of shareholders who have interests that diverge from ordinary shareholders. Investors lack experience in fending off the self-serving activities of these groups, and there are few legal constraints on their activities.
Anyone who has been paying attention to who was pushing for increased proxy access will not be surprised to learn that labor unions are the primary example of these would-be exploitative special interest groups. Through their pension funds, labor unions are empowered with enormous financial leverage over companies even now. The proxy access reforms would have allowed them to tie their labor negotiations with threats to unseat directors. The predictable result of this would be a transfer of wealth away from ordinary investors to the labor unions.
This risk is not some abstract theory. It’s reality. Larry Ribstein of Ideoblog yesterday helpfully pointed to a paper demonstrating that union dominated pension funds are less supportive of director nominees at companies where the union represents the workers.
“AFL-CIO affiliated shareholders become significantly more supportive of director nominees once the AFL-CIO no longer represents workers at a given firm,” Ashwini Agrawal, a graduate student at the University of Chicago, writes in the paper.
Armed with this evidence that labor unions use their pension funds to pursue labor relations issues at the expense of shareholder value, it should be easier in the future for reporters to keep in mind that being an advocate of shareholders is not the same as advocating proxy access, or other reforms urged in the name of shareholder democracy. Reporters and newspapers who continue to blithely traffic in confusing the two put their reputations for accuracy and objectivity on the line.
Cox, in Denying Proxy Access, Puts His SEC Legacy on Line [Wall Street Journal]
What do labor unions want? [Ideoblog]
Paper: Corporate Governance Objectives of Labor Union Shareholders [University of Chicago; pdf]
Hmmmm….which one shall I read first: (1) “SEC Shareholder Rights…blah…blah……” or (b) “On Whores”????
>the move would have left them vulnerable to exploitation by special interests, especially union dominated pension funds.>
Like they are not now??? But a single minded hedge fund is better than a union that, at the very least, has a diversified pool of capital, namely the dues paying employees
Yes restricting an individual or groups right to nominate BOD members would surely make them vulnerable to the above……
Do you even read what you write
It works both ways…..
I guess we have all seen the FT report where a German politician has been insulting IBs right and left today?
I have been against the current ‘proxy access’ issue (strongly) but I do not agree with the viewpoint that shareholder democracy is not something to shoot for.
If unions do in fact become major shareholders in a profitable firm and start pushing anti-shareholder maximizing agendas (pro-socialist causes) then the company’s profitability (expectedly) will suffer.
Now if that happen, then a union taking majot stake in a company will become a negative indicator and that company’s stock will fall (as well as credit ratings, hopefully). So the unions will be caught out at their own game.
Hence, I do not see any issue with greater shareholder democracy. I dont think the pensions fund participants will like it much if they see their funds generating negative returns for social causes. Deep down when it somes to ones own money – everyone is an avowed capitalist – socialism kicks in only when you have other people’s money.
The opposition to the current proxy access proposal is not an opposition to shareholder democracy – you are making the case weaker by arguing as such. Shareholder democracy ALREADY exists and directors can be nominated by shareholders by proxy.
The issue is whether shareholders should be able to pull it all off at the expense of the company. It is about putting some cost the action of opposing company nominess – an essentially disruptive process. All the same, no one is taking those powers away.
Unions controlling large enterprises is an unwanted outcome – but completely in keeping with free markets. Cant be helped.
Carney, do me a favor, check out this link, and plug Dealbreaker’s URL
http://www.criticsrant.com/bb/reading_level.aspx
matt-
Not everything is or has a socialist agenda as you seem to keep posting.
If you want t good example of socialism look no further than out stock markets. They have existed on it for many years.
There is a BIG difference between a Union (that for outward appearance sake) has to show some form of rationalization then a hedge fund who’s main goal is to increase return NO MATTER WHAT THE COST to the existing shareholders. Go ask the current holders of ETFC what they think of Citadel’s deal….
You should be able to see the difference..
Since what we have is a market that has been socialized and continues to ask for and get more handouts.
That’s socialism…….
Except for who the beneficiaries are, how different does a union act than a hedge/pe fund? They both extract as much cash for themselves/members and dont care what the next step is. Thats life.
at least the Union has a broader scope than hedge funds. You actually have to show the members of a union what you are up to (not that truth plays any part in it) but Hedge Funds????
Show me an industry with more sleight of hand and deception than the Hedge Fund Biz…
With regards to transparency I’ll take a union over a hedge fund everytime…
Carney, do yourself a favor and learn that worker’s interests are not necessarily against investor’s interests. On the other hand, the bunch of scoundrels that sit in the board room are always taking care of their buddies who brought them into the board. Only when they get caught do they act to remove the no good CEOs, but only after making sure the thief goes out with plenty of perks, money and free health care for life.
http://www.footnoted.org/blog-reel/doing-good-by-doing-well/
Except for who the beneficiaries are, how different does a union act than a hedge/pe fund?
?
A hedge-fund’s primary motive is maximum economic benefit. And if a 60% shareholder extracts maximum economic benefit, the other 40% also reap the same benefit.
A union’s (or union influenced/run pension fund’s) primary motive is pushing its agenda. In doing so it force the company into socialist means of production which may/may not enhance economic benefit.
However, I TOTALLY support union run pension funds owning corporations and, if they are majority shareholder, running them whicever way they please. If the main owner wants to run the company into losses – its his money, his wish.
worker’s interests are not necessarily against investor’s interests
Which part if the principal-agent problem dont you get? If I am an investor, I am trying to get the maximum returns for my investment. If I am a worker – I am trying to get the maximum pay for my contribution.
In case of a non-unionized workforce, I get what I get paid for what I am worth / have managed to make myself worth.
In a union, people get paid based on collective bargaining power – irrespective of what they individually have on offer or are worth.
the Union has a broader scope than hedge funds
Actually there is a huge difference. You put money in a hedge fund on your free will. You are FORCED to become a member of a union.
And when unions realized that people – when given a choice – were increasingly opting out of unions, they came up with a new arm-twisting scheme – declaring secret ballots undemocratic and pressurized card signing democratic.
So how do union sympathisers explain why unions are trying real hard to ban secret ballots in unionization drives and using Orwelian logic to somehow prove that being forced into a union is ‘Free Choice’?
but conducting business in complete and total secrecy without ANY regulation and representation is better??
Cherry Picking seems to suit you well…you’ve done it on all your posts.
Good luck with that
You POS
Matt: You need to chill. This is just not as important as you’re making it out to be.
Matt: the way you’re throwin around that socialist word I’m guessin yr a Republican too. If so, what’s an able bodied guy like you doing clickin away here. You should be off helpin the effort in I-raq.
Maybe matt’s anal sphincter stopped working? who knows….
Matt seems to be caught in an early cold war time trap. Poor soul.
It’s all about creative destruction, folks. With rules like this, the SEC unfortunately helps corporate managements entrench themselves. If they can save themselves from the “destruction” part, they stymie the “creation” part, too.
Capitalism at its best requires that the pot keep boiling and the lid stay off.