Corporate Governance
The most shocking practices seem normal to people who are used to them. Until 140 years ago, it was possible to own an other person in the United States, and until 160 years ago, give or take, it wasn't much commented on. In the early days of the United States, it was accepted that only land-owners could vote -- this strikes the modern American sensibility as unfair. On the other hand, someone from that period might be surprised that we allow governments to assess property taxes against non-resident land-owners without allowing them to vote.

Similarly, I believe that somebody unfamiliar with the way public corporations work in the United States would be stunned by the way elections of directors are conducted. For the unaware, what a shareholder gets is essentially a Soviet ballot -- the nominating committee of the board of directors presents the shareholders as many nominees as there are openings, and shareholders are allowed to vote for or against each. Shareholders may (I believe) produce their own ballots and distribute them to their fellow shareholders, just as political parties once printed ballots for voters. But when political parties printed ballots, the government didn't print and distribute its own ballots, paid for by the taxpayer, and bad politicians were always opposed. In corporate America, bad directors are often renominated, and shareholders rarely commit the resources to distribute alternate proxies.

In short, it would be possible for ballots to be too easy to get onto, but that's not the state we're in.

I bring this all up partially just because it bugs me. But it also happens to be timely: the SEC's latest proposal (warning: that's a long document) would allow shareholders to nominate directors in a very limited fashion. As described in a WaPo editorial:

For the first time, shareholders would have the right, albeit in limited circumstances, to have their proposed candidates for directors included for a vote on the official corporate proxy ballot.

It's a good idea; even the prospect of such a challenge could be enough to get management's attention. Currently, corporate democracy is more illusion than reality. Shareholders' right to vote for directors is generally limited to ratifying those chosen for them by corporate nominating committees. If shareholders are unhappy with management, their only option may be to sell their stock, which may not be the best outcome for either investor or corporation.

Nonetheless, opening proxies to shareholder nominees is a powerful and potentially dangerous weapon, one that requires significant safeguards against casual or frequent deployment. Boards require a blending of skills, backgrounds and personalities; shareholder nominees could disrupt the balance. Giving shareholders access to corporate proxies also presents the possibility of special-interest mischief, with outside groups such as labor unions, environmental groups or corporate raiders using the power for their own purposes rather than the good of all shareholders.

The SEC proposal tries to guard against these dangers by erecting a two-tiered, two-year-long process for shareholders to gain access to the proxy. In the first year, shareholders who have held more than 1 percent of the company's stock for at least a year could propose opening the ballot to shareholder nominees; they would have to win a majority vote for such a contest. Alternatively, more than 35 percent of shareholders would have to withhold votes against a board nominee. Then, during the next two years, a group that has owned more than 5 percent of corporate stock for at least two years would be able to nominate its own director candidates. It could put forward one to three names, depending on the size of the board, and its nominees couldn't have any financial ties to the shareholder groups.

Business groups say these hurdles aren't high enough.

I think they're far too high.

Let me first dismiss all of the objections except the expense and confusion that could be generated if a California ballot were proposed. These are essentially objections to democracy -- the complaint, condensed and boiled down, is that if we allow a majority of shareholders to elect a bad director, they could do so. Now, I'm less populist than your average bear, and I like the existence of some restrictions preventing majorities from overrunning minorities. To revert to the political analogy, I like that the first amendment to the U.S. Constitution prevents the Congress from shutting down a newspaper because it says unpopular things. What the Constitution doesn't do -- and shouldn't do -- is to prevent people from running for Congress for fear that they will try. Similarly, the way to limit the authority of majority special interests in corporations is to restrict by law what actions a board of directors may take, not to restrict nominations to the board.

It's hard to guess how many outsider nominees would be generated by the proposal, but there's one analogy that provides a starting place: shareholder resolutions. Anyone who has owned more than $2000 worth of stock in a company for more than a year can submit a resolution (though there are also restrictions on the subjects a shareholder resolution can cover). With that hurdle -- much lower than what the SEC proposes for director nominations -- one typically sees two or three shareholder proposals on the proxy statement for a large-cap company. This is hardly an unwieldy flood.
- posted by Steven @ 1:54 PM