[T]he Financial Times reported that "Merrill Lynch is poised to become the first investment bank to dedicate a team to advise companies on the growing threat of activist investors." Meanwhile, in an interview with Business Week this month, the U.S. Chamber of Commerce angrily denounced shareholders "who want to have some degree of leverage over companies."
The language is telling. Shareholders -- the actual owners of companies -- are now seen by executives as "threats" who dare to desire "leverage over companies" they own. That is seen as "causing trouble," and thus requiring "surveillance" by company management -- or worse, from America's corrupt government.
Make no mistake about it, this is all about accountability: CEO accountability for the company's share performance, for their labor practices, for having reasonable compensation structures, for major business decisions and so on. There is no law saying a large, successful company has to go public--if it wants, it can stay privately held and then focus only on generating wealth for the owner(s). But since many successful companies want to be able to grow by borrowing lots of money from investors, they decide to go public.
Nothing wrong with that, but with that decision come lots of strings attached (and for good reason). Once a company is public, it no longer exists to make the CEO, or even company founder, lots of money (although that usually happens after a successful stock float). The company now exists to make the shareholders money over the long-term.
So if shareholders want to exercise control over the company by launching dissident proposals during the company's AGM (annual general meeting) in order to protect their investment, well that's their right. Of course, Sirota neglects to mention that proxy solicitation firms have existed for a long time and are often employed by large institutional investors (insurance companies, university endowments, pension funds) to advise them on how to vote their shares on key decisions. On the flip side, management often works with these proxy firms, many of which have "investor relations" practices as well, to help sell their own proposals and counter dissident resolutions. Proxy battles are often won or lost due to these consulting firms.
Sirota is right that the government should absolutely level the playing field for all shareholders, both retail and institutional. But the government can't be relied upon to do the right thing, and frankly I don't think they will be the engine of change when all is said and done. I think the real catalyst will be big pension funds that start to care more about the long-term investments of their investors (labor unions, retired public sector employees and professors) and thus fight tooth-and-nail against exorbitant compensation practices for executives that underperform and will leave the company after a few years anyway. Some of these firms like CalPERS and CalSTRS have already stepped up, and I hope many more will continue to do so.
I used to work for a corporate governance rating agency, and I think that these unbiased agencies that assess public corporations' governance practices can play a positive role as well in terms of eliminating the asymmetric information and moral hazard problems with investing money into huge companies with oblique practices. Hopefully, these firms can eventually create market incentives for firms to improve their governance profiles--beyond what is merely required by regulators--in order to attract more investors.
But there are some things that need to change that are really fundamental to democratizing corporations and how they function. In order for a company's management to be incentivized to act in the shareholders' long-term best interest rather than their own, they need to be held accountable. And while large shareholders like Carl Icahn have their chance to have their voices heard once a year, the mechanism for providing regular oversight at a public company is the Board of Directors.
Unfortunately, in the US most directors are senior executives at companies in the same fields as the companies they are supposed to "oversee". It doesn't take an MBA to understand what a horrible conflict of interest this is--what motivation is there for a director to put the kabash on a ridiculous compensation scheme for one of their peers when it will weaken their own bargaining positions come evaluation time. This truly is the fox watching the henhouse. Additionally, it is not uncommon for "interlocks" or significant financial relationships to exist between directors and the corporation where they sit on the board. This is disclosed on the proxy statement, but since it is pretty common practice, it doesn't really raise too many eyebrows.
Conversely, in Europe many corporations have, gasp, union leaders or even rank-and-file employee representatives sitting on the Board, providing a little bit more diversity of opinion, and a lot more oversight in ensuring the corporation is not acting only in the CEO's best interest.
There have been plenty of studies demonstrating the link between strong corporate governance practices and long-term share performance, and US corporations have certainly improved their governance profiles post-Sarbannes Oxley. But compensation and board composition are still major areas that needs reform. A lot of this will need to be done by self-regulation, with market-forces acting as the incentives, and hopefully government can play a supportive role in creating good legislation in the future.
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