Through PERSWatch.net, I had the distinct pleasure of sponsoring a second CalPERS Candidate Forum (the first was last year), thanks to co-sponsorship by the Sacramento Central Labor Council, facilitation by the League of Women Voters of Sacramento County, use of the CalSTRS Boardroom, video by CalPERS and cooperation from 2010 State Board Election candidate Inderjit Kallirai and incumbent George Diehr, as well as unopposed School incumbent Rob Feckner and unopposed and Public Agency incumbent Priya Mathur. As I indicate in the opening video, my hope is not only that such forums will become routine at CalPERS but that CalPERS will push similar forums at corporations facing director election contests either through proxy access or the normal route.
Q&A Part 1
Q&A Part 2
Closing Statements and Conclusion
There is no doubt that this kind of process would allow investors to gain much better insights into the quality of the prospective and incumbent board members. However, I fear that too much shareholder democracy (too much empowerment of unsophisticated shareholders who pose inappropriate questions or poorly assess the answers provided by directors) would politicize corporate governance and be counterproductive by inadvertently eroding shareholder value. There is both academic and empirical evidence to support these concerns.
Boards need to be in dialogue with “responsible” shareholders. The problem is qualifying responsibility. Perhaps only long-term shareholders (based on duration and/or investment mandate) and those who have actually contributed capital to the company may qualify.
I sympathize with Roger Martin’s (Dean of Rotman School of Management at the University of Toronto) position on this:
“The fallacy is that CEOs think that they have an obligation to earn an attractive return for shareholders who purchased their shares from an existing shareholder at above the price at which those shares were sold out of the corporate treasury. The only shareholder to whom the CEO owes anything is the shareholder who provided capital to the company. That shareholder deserves a return at the cost of equity on that initial investment. ” – see HBR article “Why CEOs Don’t Owe Shareholders a Return on Market Value” at http://blogs.hbr.org/martin/2010/03/why-ceos-dont-owe-shareholders.html.
In summary, I am in favour of increasing “shareowner” rights, not “shareholder” rights. The former is committed to sustainable value creation by the firm, while the latter is looking to maximize returns for immediate personal gain. These are very different objectives (in fact, analogous to what was mentioned by the CalPers panelists in the video, when they make the distinction between members’ investment objectives contrasted with those of the pension fund, which has a much longer timer horizon). BTW, I’d also support increasing “stakeowner” rights.
Alex, Thanks for the very thoughtful comments. The article you reference is interesting and provocative. It reminds me of a discussion I had in 1996 or 97 with Marjorie Kelly (see https://www.corpgov.net/forums/commentary/kelly.html) as she was writing her excellent book, The Divine Right of Capital. I think you might also find our discussion interesting.
If you look at the comments to Martin’s post, you’ll see one by “Dirk” who I think is right, there might not be much resale value of a company where the CEO is espousing Martin’s position. Of course, one of the companies that might be considered close Martin’s position is Berkshire Hathaway.
I’ve been grappling with these issues for years and think there are probably better corporate forms than what are typically common today. When I headed California’s Cooperative Development Program (long since defunded), I worked on developing hybrid forms of worker, community and consumer cooperatives… combining all three in ownership positions.
I concluded there is little substitute for entrepreneurial drive, which is often (although not always) lacking in such arrangements. To grapple with these larger issues, see also Entrepreneurs and Democracy: A Political Theory of Corporate Governance (https://corpgov.net/wordpress/?p=2729) and How to Govern Corporations So They Serve the Public Good (https://corpgov.net/wordpress/?p=377)
Certainly, one of the answers lies in moving away from markets based on investors betting on synthetic derivatives. The financial services industry went from 20% of the economy to 40%… who were the phony trust enablers? We need to do a better job of incentivizing shareowners into holding for a long long time. At Aflac they get more voting rights. Others have tried higher dividends.
I don’t believe being able to ask questions of board candidates is too much democracy… especially how we did it at CalPERS. I couldn’t even get some of my own questions through the screening by the League of Women Voters. For example, I had one on “clawbacks,” seeking to hear Board positions on why there are no clawbacks among their own investment staff. The real estate market had already tanked last year but they were still paying bonuses to staff based on over-inflated values that hadn’t been repriced. The question got screened out because the League volunteer didn’t understand it.
Yes, we need to play with the format but I think such Q&A sessions with shareholders could get them thinking like owners. Symantec will be the largest company to date to hold a virtual-only meeting when they do so next week. Great for companies with synthetic owners and a passing bit code interest in information, but not for owners. Think of Q&A for candidates as part of the educational and trust building process.