Corporate Governance and Agency Problems: Destroying Democracy

by: Vincent Fernando, CFA

Excellent Economist article on the agency problem in corporate governance, in regards to the fact that the largest shareholder representatives, institutional money managers, are generally pretty docile and more focused on short term performance and their next bonus, vs. actually wanting to get the most democratic governance out of their companies.

The annual meeting is the most visible evidence that the democracy at the heart of corporate governance (especially in America, where shareholders struggle even to propose motions for discussion or candidates for the board) is a sham. Moreover, it is a sham that few people other than activists such as Mr Monks care a damn about. And even he has decided no longer to attend the Exxon Mobil meetings, having concluded that his presence serves only to legitimise the sham.

One of the great questions surrounding corporate governance is why the big institutional shareholders, which tend to vote in support of management, go along with such a sham. Why do they not act as responsible owners and insist that management take shareholder democracy more seriously? They typically leave attendance at annual meetings to activists and trade-union shareholders, which in turn gives corporate managers the excuse they need to not take the meetings seriously. The fact that the meetings are dominated by groups pursuing their own obsessions (labour practices in the developing world, say, or disinvestment from dodgy regimes) is also used by management to argue against reforms that would make them more accountable—such as making it easier to nominate candidates for the board or to force a vote on executive pay.

One obvious reason why institutional shareholders do not take more care in exercising their votes is that they are too busy trying to beat the market in the short term, so as to earn juicy bonuses, even though taking their duties as owners more seriously would lead to companies performing better in the long term.

I like how this article frames corporate governance and agency problems as an issue of democracy. Actually, corporate governance is the type of democracy which probably hits home for the average American more often than voting for president. Which means that framing this issue in such a way might be a way to encourage greater public concern for the issue.

A better understanding and faith in shareholder rights by the general public would also likely diminish a great degreee of anti-business sentiment, such as uproars over executive pay, and properly target corrective measures when true business injustices have been commited.