Critics call outside advice for shareholders "radical" and "self-serving." (11/17/00)
Dow Jones Newswires carried a piece last week on Corporate Monitoring founder Mark Latham's shareholder proposals aiming to prompt companies to hire advisory firms to give shareholders independent analysis of proxy voting issues. My proposal, the first one using Latham's model, won 8.9 percent of the vote at Whole Foods Market last March. I believe that demonstrates strong initial support, especially considering that Whole Foods has been a great performer. I expect even higher vote totals when the proposal is made at underperforming firms.
Many shareholders want independent analysis but cannot afford to individually hire proxy monitor firms like Institutional Shareholder Services, Investor Responsibility Research and Proxy Monitor. The cost of such services will be reduced and the benefits shared if shareholders hire proxy advice collectively through the companies they own, as the Latham proposal suggests.
In the Dow Jones article, Patrick McGurn of ISS is quoted as saying that LathamÕs plan is the "corporate governance equivalent of the Clinton health care plan." Although I'm not sure what was meant by that statement, I found it interesting that when ISS took note of the DJ item in The Friday Report, it added: "Critics argue that Latham's proposals are self-serving and too radical, especially when his campaign is focused on companies in which he or his comrades own shares." What is "radical" about shareholders coming together to purchase proxy analysis, rather than doing so individually? Is insurance also a radical idea? In addition, to say the proposals are self-serving because they are aimed at companies where those who support the proposals own shares seems to me absurd. Of course the resolutions are aimed at firms where supporters own shares; you have to own shares in order to get a resolution on a company's proxy.
ISS Opposes Proposal for Professional Advice (923/00)
A recent editorial by voting advisers Institutional Shareholder Services about Delaware’s new law allowing annual meetings to be held entirely in cyberspace complains uninformed, inactive small shareholders are a barrier to improved corporate governance. Yet, ISS recommended against a proposal that would have provided the information for such shareholders to become active.
The group's ISSue Alert editorial points out that Delaware’s new law allowing annual meetings to be held entirely in cyberspace comes with "some strings attached," strings which I must admit, I didn’t notice. According to ISS, before directors switch to e-meetings, they must implement: 1) voter verification procedures; 2) measures to ensure shareholders can participate at the meetings through two-way communication; and 3) the means to record shareholder votes in real time.
ISS argues shareholder meetings have become a "giant soapbox" with shareholders paying for the microphone. ISS uses its editorial as an opportunity to slam stock exchange rules which allow broker voting but suggests that real time voting at cybermeetings should boost turnout. Again, I don’t know of any shareholder activists who oppose allowing cybercasting and participation... as long as the physical meetings continue.
The real problem, according to the ISS editorial, is the lack of shareholder participation and the quality of discourse, especially among small shareholders. ISS suggests that shareholders "look for new avenues for communication with their elected representatives—the directors" by requesting one on one meetings, attendance at investor road shows and quarterly analyst calls.
While I agree with ISS that shareholders should demand that directors show up and be responsive at these venues, the fundamental issue is still information and the ability to hold the board accountable. One step in that direction is Mark Latham’s corporate monitoring proposal, which I first introduced at Whole Foods. The proposal would allow shareholders to collectively hire a firm, such as ISS, to inform and advise them of proxy issues.
ISS did shareholders no service by recommending against the proposal, which could have been a major step in improving the level of participation and quality of discourse. ISS indicates this is the major problem, especially with regard to small investors. If they really believe this is the case, let's hope they change their stance on Latham's proposal during the next proxy season.
SEC approves MSICs
The Securities and Exchange Commission approved a new breed of funds, managerial strategic investment companies. The first applicant, XSource, Inc (note: Internet addresses using that name are pornography sites) is an indirect wholly owned subsidiary of Luxemborg's Millicom International Cellular and holds majority equity interests in nine firms engaged in electronics, media, integrated networking, and Internet networking. Millicom's application has taken more than five years to process, and its approval to proceed stipulates it must do so within the next three years.
Unlike a business development company, MSICs will not be restricted private placement purchases. They can also acquire holdings as a result of providing other direct financial assistance to companies. However, the rules say 50 percent of MSIC assets must be greater than 25 percent holdings in companies to which the MISC offers significant managerial assistance. Under the agreement with the SEC, XSource would take large long-term stakes in several companies and then apply its experience to help manage the companies through board representation, serving as officers or consultants, and by providing direct financial assistance.
According to The Friday Report from Institutional Shareholder Services, the concept behind the MSIC is that "the more you help a company by working closely with it, the more the value of your investment in that company will profit." The SEC application also states that XSource hopes to attract talented managers by offering them equity based incentive compensation in the form of options and appreciation rights plans.
I wish XSource good luck. It looks like they have designed a structure that closely aligns the interests of management with those of shareholders and also provides for more effective monitoring than the usual mutual fund.
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