I just returned from ICGN 2010 (and will post on that next week). Among the thousands of e-mails I received during my week of absence, one stands out (although I haven’t gone through them all). Brendan Sheehan, the usually thoughtful Executive Editor of the Corporate Secretary, posits the “Reign of the Shareholder is Over” because 36 members of Congress wrote to BP protesting the company’s announced intention to pay a dividend.
Sheehan argues “that members of Congress are showing their true colors: they care about whatever the hottest topic of the day is. After two years of fighting for the rights of shareholders everywhere, they have turned on them almost overnight.” “So it now appears that the message from Congress is ‘Shareholder be damned.’”
First, when did a “reign” of shareowners begin? If there ever was such a phenomenon during my lifetime, I missed it. True, we are finally to the point where at about 2/3 of S&P 500 shareowners can vote against directors and if those incumbents don’t get a majority of the vote, when running unopposed, they are supposed to turn in a letter of resignation, which boards so far have more frequently refused than accepted. The vast majority of companies still operate under a plurality vote system, much like the old Soviet Union… vote for the party but if you don’t they are in anyway. Congress and the SEC are still moving forward on proxy access, so it isn’t as if Congress has all of a sudden turned against trying to rebalance, in a small way, the huge advantage given CEOs over shareowners.
Of course Congress cares about the hottest topics of the day. They are elected to represent the public. Too often, they are more concerned with taking money and advice from lobbyists. On issues as huge as the Gulf spill, they can’t duck out completely. Congress needs to at least attempt to get BP to hold on to cash needed to pay for cleanining up the oil spill and damages, although it is hard to imagine that any amount of money will undue all the damages to people and to nature.
BP also faces political pressure on their home-front, since dividends funded a good portion of British pensions. Apparently, BP may hold off on paying the dividend, placing the money in an escrow account “until the full scale of the company’s liabilities” from the spill are clear. (BP plans to defer dividend after pressure from Obama, Times of London, 6/1/10)
After purporting to show that Congress has turned against shareowners, Sheehan goes on to argue that giving more power to shareowners is a mistake because in speaking before the Financial Crisis Inquiry Commission, Warren Buffett, the largest shareowner at Moody’s, defended their lack of foresight regarding the risk of subprime loans. Since Buffett made the same mistakes and assumptions as the rest of management, “it is a slap in the face to all those who argue that greater shareholder representation on boards would have mitigated some of the problems.”
Sheehan mistakenly lumps all shareowners into a single class. Buffett is widely known for the passivity of his management style, once a company has entered the Berkshire Hathaway fold. Members of the Interfaith Center on Corporate Responsibility (ICCR) aren’t nearly as passive as Buffett. As early as 1993, ICCR members filed six resolutions to more closely regulate subprime mortgages. According to ICCR Executive Director Laura Berry:
When our institutional investor members view their holdings through the lens of justice and sustainability, the priorities for action that emerge frequently anticipate market moves. Time and time again, the prophetic voice of faith has allowed our members to anticipate emerging areas of corporate responsibility, in investment policy as well as in social, economic and environmental policy. For more than a decade before anyone else, our visionary members have been expressing concerns related to predatory lending practices, inappropriate underwriting standards and the potential consequences of securitization of debt instruments.
Of course, it would be nice if proxy access empowered long-term responsible shareonwers like the members of the ICCR. Unfortunately, even a best case scenario is likely to leave ICCR members mostly out of the loop because of the high thresholds that will be required to nominate a small portion of board members.
The government has a role to play in regulating companies and in ensuring corporations are operated more democratically. Certainly, they capture of regulators by businesses doesn’t help avert disasters such as the Gulf spill. Even before Citizen United, active shareowners like ICCR sought to limit the political influence of not just the companies whose stock they own, but all companies. Now, that task is even more urgent.
The reign of shareowners has yet to begin. If it ever does come about, let’s hope activists like ICCR are empowered, rather than pacifists like Buffett. Buffett may make lots of money, but don’t count on shareowners like him to foresee or forestall housing bubbles, oil spills or global climate change. Of course, according to organizations like the Business Roundtable, governance reforms, like even a mild for of proxy access, will only empower “special interests” that will “hurt the U.S. economy.”
It may take a little hurt in the short-run to address long-term problems. I hope Brendan Sheehan and the corporate governance professionals he works for aren’t too short-sighted.