Proxy Access

Gretchen Morgenson’s Strange Argument For Proxy Access

We spent so much time yesterday talking about Ben Stein that we never got around to Gret-Gret’s Sunday essay decrying the SEC’s recent proxy access decision. Which is a shame because it was pretty loopy too.
Morgenson begins with the contention is that the recent losses by publicly held financial companies are the result of director incompetence. “In recent months, owners of many financial stocks have lost billions because the directors who represent them were clueless about risky mortgage operations or toxic loans held by their companies,” she writes.
That’s at least plausible. There are lots of dope and time servers on corporate boards. It’s certainly not obvious, however. We’re not sure that any board of directors, regardless of its composition, would have or could have prevented any of our largest financial institutions from getting caught up in the follies of the credit boom. But let’s grant her this point for the sake of argument.
It’s the next part where she completely loses us. “With so few capable directors who hold themselves accountable to owners at public companies, is it any wonder that pension investors are turning to alternatives like private equity? Those managers act like owners,” she writes.
This is quite a strange point to make in a column arguing for greater shareholder democracy. Those private equity firms—even the publicly traded ones—even less open to investor control than most public companies. It’s almost like some hidden, subconscious and highly intelligent corner of Gret-Gret’s mind smuggled in this paragraph to undermine the rest of her argument.
S.E.C. Sends Investors to the Children’s Table [New York Times]

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.

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SEC Nixes Proxy Access Proposal

The confused idea of shareholder democracy suffered a set-back today when the SEC voted 3-1 to allow companies to block investors from placing board nominees on official corporate election ballots. There will no doubt be lots of hand-wringing about this vote but most of what you need to know about the proxy access proposals can be found by looking at its biggest proponents: labor unions and union dominated pension funds. The funds and unions favor proxy access rights not because they have an altruistic urge to help shareholders in general or out of a metaphysical attachment to democracy. They supported it because they believed it would give them a leg up in negotiations with management and corporate boards. Ordinary shareholders can breath a little easier that this attempted power grab has failed.
SEC denies shareholder bid for more power in board elections [LA Times]

Shareholder Democracy and the New York Times

Gretchen Morgenson is one of the most aggressive advocates of shareholder voting rights proposals. Criticism of the proposals to increase shareholder proxy access only seems to strengthen her resolve. One source of this strength appears to be her spectacular immunity to argument and evidence.
One would think that advocates of a massive, centralized, bureaucracy driven overhaul of the proxy access rules would want to build their arguments on a foundation of improving the shareholder value. After all, investors don’t buy shares of public companies in order to exercise metaphysical governance rights or realize some Platonic form of ownership. They buy shares to invest, to make money. That’s why we call them investors.
And, in fact, many advocates of the new proxy access reforms do claim that there proposals would somehow enrich shareholders. (We think they’re lying, mistaken or misled, but no reason to go into that now.) But not Gret-Gret. She frankly acknowledges that corporate governance is producing amazing returns for shareholders.
“Given that this year’s stock market performance has been so stellar, most investors are probably pretty content. It is not as if shareholders have their torches in hand and are ready to storm the nation’s boardrooms,” she writes.
It’s hard for us lowly editors of DealBreaker to think like a New York Times columnist. But we’re pretty sure Gret-Gret thinks that this strengthens the case for increased proxy access. Because most shareholders are content, the changes “would probably not result in a mass ouster of directors,” she writes. This may be the first time in history generalized contentment has been cited as bolstering the case revolutionary change.
Of course, except in the Business section of the New York Times, most people paying attention to this issue understand that the case against the proxy access proposal doesn’t rest of a nonsense fear of the overthrow of the directors of the means of production. It rests, instead, on a respect for federalism, insights into public ignorance, the ability of dissatisfied shareholders to sell their shares and a rational fear of special interest exploitation. But to read Gret-Gret, you’d think these objections have never been raised.
But if it’s not mismanagement that’s driving Gret-Gret, what is? It seems to be a desire to achieve some sort of cosmic justice. Or, as she puts it, to ‘do the right thing.”
“Ownership usually brings certain rights, after all,” she writes. And Gret-Gret—and, of course, the employee dominated pension funds—know exactly what those ‘certain rights’ should be.
As long as we’re sticking the knife in, might as well give it a twist. Larry Ribstein points out that whatever the New York Times editors might think of shareholder democracy, the owners of the New York Times have a very, very different view.
The Owners Who Can’t Hire or Fire [New York Times]
The NYT and shareholder rights [Ideoblog]

SEC Still Confused On Proxy Access

ShareholderDemocracyIsAScam.gifOn the eve of the official deadline for comments on the two conflicting shareholder access rules, the SEC is not closer to reaching consensus that it was when the controversy started several months ago, according to the Wall Street Journal.

Mr. Cox voted with the commission’s two Democrats for a proposal that would allow shareholders with a 5% stake in a company to propose changes to bylaws governing the election process. He said he favored this rule. Still, he voted with the two Republican commissioners for a rule that would do the opposite and allow companies to reject such proposed bylaw changes.
By putting both rules out for comment, Mr. Cox sought to foster more debate and buy time for the commission to work out a compromise before his self-imposed year-end deadline. But the commissioners are no closer — perhaps are further apart — and public comments, which are due tomorrow, aren’t expected to point the way toward middle ground.

Apparently, the retirement of one of the Democratic appointees to the commission has shifted the balance of power on the issue. The commission is scheduled to vote on the issue in November but a replacement for the retired Democratic appointee won’t be made until after that. Some are urging the SEC to scrap both rules and just start over.
Update: Larry Ribstein points out that there’s no reason this issue needs to be a political football at the federal level. Why not let state corporate law handle this?
Can SEC’s Cox Win Playing the Middle? [Wall Street Journal]

Can’t get enough of proxy access coverage? Check out Steve Bainbrige’s take here and the Business Law Prof blog’s insights here.

The Dangerous Myth of Shareholder Democracy

ShareholderDemocracyIsAScam.gifThe myth of shareholder democracy holds a powerful sway over public opinion. The comments we’ve received on our two articles on the proxy access rules now up for comment at the Securities and Exchange Commission demonstrate that people continue to be bedeviled by the misguided analogy with democratic political regimes.
One of the mental levers the mythologists of shareholder democracy use to make their case is a kind of demonology of corporate managers. Although corporate insiders, especially chief executives, have demonstrably lost power in recent years to shareholders and independent directors while the risks of running a public company have increased, the continued climb of executive pay seems to have convinced many that executives are somehow fleecing shareholders. The evidence for this is underwhelming, however. While bad characters exist in executive suites and board rooms, they hardly justify enacting wide-ranging corporate governance reforms. Bad CEOs make bad law.
It’s important to remember that our system of corporate governance has generated enormous wealth for shareholders and workers over the years, bringing us unprecedented prosperity. We should exercise caution when seeking major reforms, especially when the costs of those reforms will be difficult to measure and the reforms will be next to impossible to reverse. By creating a uniform, national rule for proxy access, the proposed reforms would shut off jurisdictional competition and experimentation between the states. Worse, the proxy access reform is clearly viewed by many of its proponents as a first step in what they view as a revolution in corporate governance. There will be more to come. The proxy access reforms are precedent not a final resting place.
Some of the most thoughtful criticism of our first essay came from Beth Young, who I believe is the author of the Shareholder Proposal Handbook and a senior research associate at the Corporate Library.
We rough up Young’s objections to our articles after the jump.

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