SEC Member Doesn’t Like Shareholder Democracy

108-1SEC Member Doesn’t Like Shareholder Democracy

Some things are the way they are supposed to be. Some things are not. An excellent example is shareholders and corporations. The perspective that most people have in a capitalist, private property system is that if you own a company, your decisions should determine what the company does. And this does happen when the stockholders control very large amounts of stock, for instance, in close corporations. But the influential and powerful corporations often have thousands of stockholders. When the stockholder base is diffused among so many players, it is very difficult for the stockholders to exert effective control.

As a result of this very large corporations tend to operate under CEO leadership with little input from shareholders.

In very large corporations, control by management (a combination of the directors and officers) is maintained with a very small percentage of stock ownership through the use of corporate records and funds to solicit proxies. (Reed, 2010)

Now let’s take a look at the Reuters article.

Any investor who owns at least $2,000 or 1 percent of a company’s stock for a year or more can bring a shareholder proposal, so long as it meets certain requirements. The U.S. Securities and Exchange Commission approved Fredrich’s pitch because it was designed to financially benefit all GE owners and not just him.

That, at least, distinguishes it from resolutions involving environmental, political or social issues that may not serve the interests of shareholders generally. SEC Commissioner Daniel Gallagher, speaking to the annual confab of M&A practitioners last week at Tulane University in New Orleans, argues that “it’s time we asked whether the shareholder proposal system as currently designed is a net negative for the average investor.”

Gallagher, one of two Republicans on the five-member SEC, claims it’s too easy for investors to get resolutions on company ballots. As a result, activists and corporate gadflies “hijack” elections, he says. The commissioner cited statistics showing that a third of proposals come from organized labor and a quarter from social or policy investors and religious institutions.

The upshot is a system that encourages “taking money out of the pocket of someone investing for retirement or their child’s education and using it instead to subsidize activist agendas,” according to Gallagher. The SEC’s rules, he says, should ensure that these activists do not “crowd out every-day and long-term investors” or advance causes “inconsistent with the promotion of shareholder value.”

http://blogs.reuters.com/breakingviews/2014/04/01/rob-cox-ge-should-put-itself-up-for-sale/

Cox, R. (2014, April 1). Rob cox: Ge should put itself up for sale. Reuters, U.S. Edition, Retrieved from http://blogs.reuters.com/breakingviews/2014/04/01/rob-cox-ge-should-put-itself-up-for-sale/

Daniel Gallagher doesn’t like the current system because it’s too easy to get resolutions on company ballots. That is a fascinating conclusion to reach considering the facts.  There 10,033,130,000 shares of GE stock and this year there will be six resolutions for the stockholders to vote on. That number (6) would seem to imply that it is not that easy to get a resolution approved for a shareholder vote. Now, it is not publicly disclosed by the company how many actual shareholders exist but since the number of the shares exceeds the population of this planet by a comfortable margin, there are probably a lot of them. So, a disinterested observer might well think the system wasn’t broke at least in the direction of too many resolutions.

But the best part is the quote from above: “taking money out of the pocket of someone investing  for retirement or their child’s education and using it instead to subsidize activist agendas.” So, when shareholders vote to use their control of their investment, their money, to do something they want rather than maximize profit they’re stealing from children and retirees. It makes one weep that people should vote to decide what to do with their investments.

Gallagher understands that the only reason a corporation exists is to enhance shareholder value, and when some vile activist or corporate gadfly persuades gullible shareholders to do things like invest in America, the natural order of things has been violated and shareholder control must be reined in.

But shareholders have rights in the control of the company because they own it. And democracy is messy. Some people will make illogical or unrealistic proposals. Some will  and have made proposals that Gallagher will not approve of. But investors should be able to make decisions about their company and voting – democracy is the best way to do that. There is no rule from on-high or anywhere else that shareholder value is the only or even the most important goal of a corporation. Stockholders can decide to do something else.

We have reached a point at which stockholders appear to gaining a little more control over the companies they own. There are people, as there always are, who think they know best what should be done with these companies even though they don’t own so much as a single share, because, well, they like Mr. Gallagher, just know.

James Pilant

*Reed, O. (2010). The legal and regulatory environment of business. (15th Edition ed., p. 420). Boston: McGraw Hill Book Company.

Analysis & Opinion | Reuters (There is some content also used above but if that content was removed, the section below wouldn’t make sense. jp)

Gallagher, one of two Republicans on the five-member SEC, claims it’s too easy for investors to get resolutions on company ballots. As a result, activists and corporate gadflies “hijack” elections, he says. The commissioner cited statistics showing that a third of proposals come from organized labor and a quarter from social or policy investors and religious institutions.

The upshot is a system that encourages “taking money out of the pocket of someone investing for retirement or their child’s education and using it instead to subsidize activist agendas,” according to Gallagher. The SEC’s rules, he says, should ensure that these activists do not “crowd out every-day and long-term investors” or advance causes “inconsistent with the promotion of shareholder value.”

He’s right, to a point. It is a waste of time for investors to vet proposals that have nothing to do with the stewardship of their capital. But stifling shareholder speech has consequences. Stricter limits may allow, say, GE to keep a silly measure calling for its sale off the ballot, but they could also prevent owners from voting on more intelligent notions, like splitting the chairman and chief executive roles.

The Supreme Court ruled four years ago that free speech rights apply to corporations under the Constitution, including the right to make campaign contributions to politicians that favor profit-making causes. Shareholders also deserve protection under the First Amendment – no matter how wacky they may sometimes sound.

via Analysis & Opinion | Reuters.

From around the web.

From the web site, Global Corporate Law.

http://globalcorporatelaw.wordpress.com/2012/09/25/shareholder-democracy-and-future-reform/

Writing on the corporate governance blog earlier this month, Bob Tricker observed that “serious”  interest in corporate governance is a recent phenomenon which only came to the fore following Sir Alan Cadbury’s 1992 Report. The dichotomy is that despite the existence of regulatory bodies such as the US Securities and Exchange Commission since the mid-1930s, it was not until problems such as the Enron scandal, the sub-prime crisis and more recent Libor scandal – that “corporate governance” became a buzzword in the business sphere, company law and regulation.

For Tricker, corporate governance  – to which constructs such as marketing, production, finance, operations research, and management information systems have only recently ceded ground – is quickly becoming the focus of a company’s organisational chart. Themes such as the board of directors, executive directors’ remuneration and their relationship with management are all now very much at the apex of the debate about issues such as shareholder democracy, accountability and transparency in the corporate sphere. It is often said that good corporate governance is about promises kept: Macey, Corporate Governance: Promises Kept, Promises Broken (2010). Conversely, bad corporate governance is considered “promise breaking behaviour”.

The UK – which is seen as a “laboratory” for shareholder activism – has high rates of executive remuneration and on average bosses earn seventy five times more than workers.

2 thoughts on “SEC Member Doesn’t Like Shareholder Democracy

  1. Just a footnote: there’s a good argument to the effect that shareholders are not owners of the company — they merely own a claim to a portion of the profits (if any). John Boatright defends this view, as does Alan Strudler, and Steven Bainbridge (all 3 present different arguments for the same conclusion).

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    1. I’ve approved your comment and appreciate the information. I’ll look into the sources you provided and build my knowledge. I appreciate your kind advice, and will always be a supporter of your site. jp

      Like

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