Are greater shareholder rights coming? The answer, obviously, is yes. The question now is what form those increased rights will take, and what the consequences will be for publicly-traded companies and their management. Tara Siegel Bernard at the New York Times penned an interesting article about Shareholder Democracy in which she addressed some of the salient issues (see Voting Your Shares May Start to Matter).
What would happen if all the small investors banded together and cast their ballots during proxy season, the time of year when all shareholders get to vote on corporate issues? How much of an impact would they have?
Until recently, the votes of small investors — the ones who didn’t just throw their ballots in the trash — were largely meaningless. Even if they were angry about soaring executive pay and risky business practices, there was little they could do.
Sure, in theory, investors could vote for the people who serve on the board, many of whom are paid handsomely to oversee management and set executive pay. But investors don’t have any say on the nominees. Nor do they have much of a real choice even if they do vote. Say you withhold a vote for a candidate running uncontested. It doesn’t matter, since directors can win without a majority.
And if you chose not to vote? Your broker is allowed to cast your ballot without your permission, and brokers typically vote in line with management.
So much for shareholder democracy.
But the tide is beginning to turn, albeit slightly. In recent years, more companies have adopted a “majority rules” requirement…And starting this year, brokers can no longer vote shares held in their customers’ accounts without permission.
Investors would also stand to benefit from the so-called Shareholder Bill of Rights, legislation proposed by Senator Charles Schumer of New York and Senator Maria Cantwell of Washington…
One provision…would make it easier for certain investors to nominate independent directors to corporate boards, or what is known as proxy access.
The Senate proposal would [also] require that candidates for director receive at least half the vote in an uncontested election and require all directors to face re-election annually (unless shareholders approve otherwise). It would also give shareholders a so-called say on pay, which is a nonbinding vote on executive compensation practices.
More companies are beginning to do this voluntarily, and corporate governance experts say these votes can actually help curb excessive pay.
I am generally supportive of increasing shareholder rights. After all, shareholders are the rightful owners of the corporation, and as such, deserve to have a say in its direction.
That said however, and as I have argued before, we have to be careful what kinds of rights we bestow to what kinds of shareholders, …especially those we are willing to grant to shareholders of the short-term “trader” variety (see Different Stock Classes). As I pointed out in that post, there is an increasing wedge developing between investor / owners and investor / traders.
Historically, shareholders were individual company owners (often dispersed) who held stock for long periods of time. Today, the picture is quite different. Shareholders are represented less and less by individuals holding stocks for the long-term, but by institutions looking to make a quick buck – buying and selling with incredible frequency. The rise of such “traders” (those who seek to profit from near-term volatility in stock prices) has changed the nature of the system. Whether they be institutional or individual, it seems that there is a large class of traders (not investors) today who are looking to profit from the tiniest movement in share price. These traders are inconsistent with the spirit of the view of the shareholder as owner. They are not really “owners”, and often do not even necessarily care about the survival of the firm. They only care about micro-movements in share price.
To the extent that we end up granting increasing rights to investors of the institutional “trader” variety, we might end up with a system that wreaks havoc for corporations and their management. In the extreme, it could create an environment in which management spends too much time and attention fending off proxy attacks and not enough on the tasks with which “owners” have entrusted them in the first place – running a sound business so as to maximize profit over the long-term.
Disclosure: No positions
