L'Apel: Democratic Capitalism at Risk

Recently, ICGN held their annual conference in Paris. From the Twitter feed, it appears I missed a good one. (see ICGN Via Twitter) I’ve already mentioned Jon Lukomnik’s appeal to look again at the idea that shareowners’ interests and executives’ can be aligned through compensation strategies.

I think one origin of our errors was revising the tax code so that executive compensation above $1 million is only a tax deductible expense if performance based. The result has been, as Lukominik observes, that compensation plans have taken on the characteristics of “a slot machine: They pull a lever and three years later out comes a trickle of coins or a fountain of folding money.” This is a topic worthy of much discussion.

Another truthsayer at the conference was Robert A.G. Monks, whose L’Appel can be read as quickly as fast food but provides nutritional value of a much higher order. Bob lays out a number of observations. I’ll just list a few:

  • Our governance systems are chartered and enforced (if at all) nationally, but an increasing percentage of total assets are held “off shore.” Owners, rather than governments or other entities, appear to be the only viable candidates to enforce corporate governance standards.
  • Our framework is based on the assumption that shareowners engage and hold management’s accountable for their performance… but the majority of shareowners are passive because of conflicts of interest, cost and collective action problems.
  • This leaves public, union and SRI funds as the only ones left on the field, depriving the market of mainstream experience and insights and it allows shareowner activism to be trivialized and dismissed as representing only special interests.
  • Wall Street captured a generation of bright professionals that might have gone to more productive employment and investment banking moved from the periphery to the largest industry in land. Money and power; plain and simple greed.
  • Corporations insist that government meet their demands, even if they run counter to the interest of citizens… they exercise unusual veto powers.
  • The average investor thinks of “business” as an impersonal entity owned by the very rich and managed by over-paid executives. “But the hundreds of millions of shareholders – most of whom are of modest means – are the real owners, the real entrepreneurs, the real capitalists under our system. They provide the capital…”
  • The same corporations act as investment banker and financier to companies whose shares it holds in its fiduciary portfolio. “The fundamental law of trusts is unenforced and is treated as merely a verbal inconvenience.”
  • Those in power “prefer the present ownerless situation where corporate executive power is accountable to government which it easily dominates.”

Monks contends what may be at risk is the survival of democratic capitalism and the sustainability of the traditional real return on equity investments of 6% plus or minus per annum in excess of inflation. He calls for mobilizing the voting power of institutional shareowners through:

  1. an educational program and
  2. a political action program

Of course, talking at ICGN, he hopes members will take on these tasks in a more meaningful way. The US Chamber of Commerce intervenes in scores of court cases, such as the SEC’s proxy access rules. Maybe ICGN could do the same.

There can be no effective corporate governance, until, unless and to the extent that the major institutions become involved. This will not happen until and unless there is a formal legal policy that shareholder activism in the public interest and is the national policy.

Government policy would help, but as Monks also points out, corporate executives exercise unusual veto powers over governments and can “off shore” assets, jobs, and even corporate identity.

I’d love to see ICGN take up the task of education and political intervention. However, as someone with little influence with ICGN or its member funds, I’m putting my efforts into organizations and social media mechanisms aimed at the individual investor. Individuals create and guide organizations. Institutions may only push for better, less conflicted corporate governance when individuals push them to do so. Perhaps by pushing from both the top and bottom we can somehow meet with success in the middle.

Analysis by Broadridge shows increasing reliance by companies on electronic delivery of proxy materials. Over a period of three years (2007-2010), voting by those getting e-proxies rose from 4.8% to 5.7%. However, the majority of proxies are still going out by mail and voting by those shareowners fell from 18.6% to 15.4%. Obviously, those of us pushing from the bottom up have our work cut out for us. However, if even 50% of retail shareowners were voting, I would bet they would also start putting pressure on the conflicted institutional investors like the mutual funds and university endowments that Monks is focused on.

Internet tools like CorpGov.net, ProxyDemocracy.org, MoxyVote.com, Shareowners.org and ProxyExchange.org have been built on shoe-string budgets. A small amount of money pumped into them and perhaps some consolidation of efforts might go a long way. Also promising would be a push toward an open system of client-directed voting. See comments to the SEC from VoterMedia.org and from James McRitchie. I hope readers will also support such efforts.

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