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]