There is an intriguing place where we might begin the work of a renewed economic populism: in corporations, not the capital. If the goal of populism is the amelioration of life for the many, then President Obama could strike a confounding (in a good way) pose by calling on the private sector to take up an idea put forward this week by Fareed Zakaria: unleash a corporate stimulus. “The Federal Reserve recently reported that America’s 500 largest nonfinancial companies have accumulated an astonishing $1.8 trillion of cash on their balance sheets,” Fareed writes. “By any calculation (for example, as a percentage of assets), this is higher than it has been in almost half a century. And yet, most corporations are not spending this money on new plants, equipment, or workers…[Such] investments would likely have greater effect and staying power than a government stimulus.” A populism that begins in the boardroom—that would really be change we could believe in. (The Right Kind of American Populism and Obama’s CEO Problem, Newsweek, 7/12/10).
I’m not sure Obama has the power to get the private sector to start spending. Congress certainly didn’t do a good job of tying bank bailouts to bank loans. However, I certainly agree with Jon Meacham and Fareed Zakaria, populism could begin in the boardroom.
Imagine a political system in which the incumbents get to select all election candidates, and voters have no choice but to vote for these nominees, or not vote at all. Such “democracy” rules the US proxy process by which investors elect corporate board members. Now, an “open ballot” movement among big shareholders is working to shake up how boards are elected.
The Magna Carta was drafted in response to the excessive use of royal power, while the move for proxy access stems from the abuse of power by management at Enron, WorldCom, Tyco and others.
The first clause of the Magna Carta guarantees “freedom of elections” to clerical offices of the English church to prevent the king from making appointments and siphoning off church revenues. A shareholder’s Magna Carta would prevent managers from having undue influence over corporate boards and will prevent them from using corporate coffers as their personal bank accounts.
Think markets and proxy contest are the answer? Who has enough to buy BP? Even after much of the wealth has been destroyed, the takeover and transition of poorly governed corporations back to profitability is also expensive, generally estimated to range between two to four percent of the value of the firm. There may be very heavy transaction costs for employees through layoffs, lost wages, increased divorce and suicide rates, as well as to communities in the form of lost taxes and charitable contributions. In contrast, the cost of proxy driven changeovers have run considerably below one percent.
In August of 1977, the Business Roundtable recommended “amendments to Rule 14a-8 that would permit shareholders to propose amendments to corporate bylaws, which would provide for shareholder nominations of candidates for election to boards of directors.” Their memo noted such amendments “would do no more than allow the establishment of machinery to enable shareholders to exercise rights acknowledged to exist under state law.” Now the BRT seems to think proxy access will be the end of the world.
In “Toward Democratic Board Elections,” published by The Corporate Board (7-8/2003) I noted, “After years of allowing shareholder proposals concerning elections, the SEC in 1990 issued a series of no-action letters ruling that proposals concerning board nominations could be excluded. Proposals by institutional investors were beginning to win majority votes. Perhaps the SEC realized failing to issue no-action letters could soon have consequences.” The court in AFSCME V. AIG came to the same realization three years later.
Competition for board positions has traditionally stimulated share value. Researchers have found that firms with stronger shareholder rights had higher firm value, higher profits, higher sales growth, lower capital expenditures, and fewer corporate acquisitions. Investors who bought firms with the strongest democratic rights and sold those with the weakest rights would have earned abnormal returns of 8.5 percent per year during a sample period.
It is paradoxical that the standard justification for autocratic practices in industry is its alleged efficiency, since empirical research results do not support that conclusion. Increased rank-and-file responsibility, increased participation in decision-making and increased individual autonomy are all associated with greater personal involvement and productive results.
The keys to creating wealth and maintaining a free society lie primarily in the same direction. Both require that broad-based systems of accountability be built into the governance structures of corporations themselves. By accepting the responsibilities that come with ownership, pension funds and other institutional investors have the potential to act as important mediators between the individual and the modem corporation. Indeed, populism that begins at the boardroom could change populists could believe in.
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