No Innocent Shareowners #OWS: The Duty of Care

John Paulson, the hedge fund titan who made billions in the financial crisis by betting against the subprime mortgage market defends the 1%: “The top 1 percent of New Yorkers pay over 40 percent of all income taxes, providing huge benefits to everyone in our city and state.”

“I don’t think we see ourselves as the target,” said Steve Bartlett, president of the Financial Services Roundtable, which represents the nation’s biggest banks and insurers in Washington. “I think they’re protesting about the economy. What’s lost is that the financial services sector has to be well capitalized and well financed for the economy to recover.” (In Private, Wall St. Bankers Dismiss Protesters as Unsophisticated, NYTimes, 10/14/2011)

What’s going on in America right now may be the world’s first genuine social-media uprising. Besides the standard channels of Facebook, whose Occupy Wall St page now has nearly 170,000 fans, Twitter, where the hashtags #occupywallst and #ows spew out dozens of tweets a minute, and of course a dedicated website, Occupy Together, protesters are also organising via Meetup, which at the time of this writing shows events planned in over 1,300 cities worldwide.

However, the author of the Economist article from which the above quote is taken goes on to point to the relative shallowness of the protest to date. It doesn’t take much time to “like” or “follow.” (#Occupytheweb, theEconomist, 10/11/2011) Still, the mainstream press seems to be paying attention. Here are a few tidbits from Growing Income Gap May Leave U.S. More Vulnerable to Crisis, Bloomberg Businessweek, 10/13/2011:

Since 1980, about 5 percent of annual national income has shifted from the middle class to the nation’s richest households. That means the wealthiest 5,934 households last year enjoyed an additional $650 billion — about $109 million apiece — beyond what they would have had if the economic pie had been divided as it was in 1980, according to Census Bureau data… Between 1993 and 2008, the top 1 percent of families captured 52 percent of total income gains, according to a 2010 analysis of Internal Revenue Service tax data by economist Emmanuel Saez of the University of California, Berkeley…

The U.S. Gini score rose from .39 in 1968 to .47 in 2010, meaning that incomes were becoming increasingly unequal… In the 30-nation Organization for Economic Cooperation and Development, only Turkey and Mexico have more unequal societies than the United States. In the U.S., the rich-poor gap widened by 20 percent since the mid-1980s, more than in most developed countries… In the U.S. and Europe, austerity policies may be exacerbating the trend… Such seismic shifts in popular sentiment can have lasting effects. The Dow Jones Industrial Average didn’t regain its September 1929 peak of 355.95 until the same month in 1954.

“You’re going to lose an entire generation of investors,” says Ritholtz. “And that’s how you end up with a 25-year bear market. That’s the risk if people start to think there is no economic justice.”

A Time magazine survey found 27% have a favorable opinion of “the Tea Party movement.” 54% had a favorable impression of Occupy Wall Street. 68% want the wealthy to pay more taxes; 71% want to see bankers prosecuted for the 2008 crash; 79% believe the gap between rich and poor in the U.S. has grown too large; 86% believe Wall Street and its lobbyists have too much influence. (Poll: Americans Like Occupy Wall Street a Whole Lot More Than the Tea Party, Washington Monthly, 10/14/2011)

Next up: Occupy where the 1 percent “live, work and play.” The super rich all belong to country clubs and other exclusive institutions. If the movement is targeting a specific bank, a picket of the CEO’s country club will hit them one place it hurts: their easy comfort amongst high society. (6 Places to Occupy Next: Protest the 1% Where They Live, Work and Play. By Daniel Denvir, AlterNet, 10/14/2011)

Occupy Wall Street protests and ‘The Decline of the West’ by Bob Monks in The Washington Post (10/10/2011) notes that shareowners may think of themselves as victims of CEO power, as innocent but he links to a famous quote by Justice Brandeis:

There is no such thing to my mind as an innocent stockholder. He may be innocent in fact, but socially he cannot be held innocent. He accepts the benefits of the system. It is his business and his obligation to see that those who represent him carry out a policy which is consistent with public welfare.

Monks goes on to make a plea that the Tea Party and Occupy Wall Street should make both investors and boards sit up and take notice:

It’s time for institutional investors to step up and honorably confront the corporate failure to fulfill fiduciary responsibility to beneficiaries and to deal openly with the conflicting interests within their own organizations.

Boards, watch the protests and understand that your dominance of the system cannot continue. And shareholders, vigorously support the protests and use them as a starting point to become active owners, to call boards and CEOs to accountability, and to take responsibility for our system of democratic capitalism.

This proxy season will see a lot more failed say on pay votes. CalSTRS, for example, is already preparing letters to 122 companies warning them they will need to revise their pay plans. USPX Shareowner Guidelines for Say-on-Pay Voting got posted in August… too late for last proxy season but now readily available for the upcoming season. We can also expect a large number of shareowner proposals seeking at least disclosure of political contributions by corporations, if not a “say on contributions.”

Most importantly, we will also see proxy access proposals under Rule 14a-8 at a few companies. Who will be targeted? One group of vulnerable companies would seem to be the 10 companies recently identified as “a selection of GMI’s most poorly rated firms in North America, representing an array of environmental, social and governance (ESG) and accounting transparency issues (which GMI calls ESG+) identified through comprehensive GMI research.”

Apollo Group, Inc.APOLPersonal Services
Comstock Resources, Inc.CRKOil / Gas Exploration / Production
Comtech Telecomm. Corp.CMTLCommunications Equipment
Discovery CommunicationsDISCABroadcasting
EZCORP, Inc.EZPWConsumer Financial Services
K-Swiss Inc.KSWSFootwear
M.D.C. HoldingsMDCHomebuilding
News CorpNWSAMedia Diversified
SandRidge Energy Inc.SDOil / Gas Exploration / Production
Scientific Games Corp.SGMSCasinos / Gaming

Brief descriptions of the key concerns identified at each of these firms are given in the report, but include:

  • Board independence issues, including long-tenured directors, insiders and other non-independent directors;
  • Executive remuneration problems including pay-performance disconnects, weak performance targets, and overly discretionary policies;
  • Ownership structures that disadvantage most public shareholders such as multiple share classes with disparate voting rights, or controlling shareholders
  • Poor disclosure of environmental and health and safety risks and policies;
  • Accounting transparency issues involving revenue and expense recognition and other forensic accounting measures

Of the companies listed, Comstock Resources, Comtech Telecomm, MDC Holdings and SandRidge Energy look the most vulnerable to shareowner influence. Unfortunately, most of the others are nearly controlled by founders and/or CEOs but I’m sure attempts will be made at News Corp. and others. Like Justice Brandeis’ statement about no innocent shareowners, the GMI report concludes:

The duty of care requires that fiduciaries perform their functions with a high level of competence and thoroughness. Traditional measures of risk have often failed to identify major corporate failures, causing great loss of value for investors and often irreparable reputational harm to corporations. GMI has developed this list to highlight companies fiduciaries, investors and other corporate stakeholders should review with concern, based on a number of ESG risk factors.

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