I'm not sure what all this means, which, I suppose, makes it a blog. The recent kerfluffles over office décor, bonuses and corporate jets borrow from the style of the shareholder-centric corporate governance model, but without the conventional shareholder. In both the Bank of America Corp.-Merrill Lynch & Co. and Citigroup Inc. controversies over management behavior, the shareholder is really the government, not an individual investor or an institution, and the audience is not other shareholders as much as it is the public.
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A few thoughts come to mind. First, the very fact that the government has arrived on the scene is a sign that shareholders failed in their all-important owners-as-monitors task. It's true: Managers and boards get failing grades as well, and there are cases where shareholders clearly didn't know what was going on. But it's also true that shareholders were quite content with high-revving businesses with exposure to the mortgage market or derivatives as long as they were generating big earnings. And I can't recall a single shareholder, activist or not, that made a big stink about Citi or Merrill or Lehman Brothers Holdings Inc.'s exposure to toxic assets before subprime broke. At the same time, shareholders collectively accepted the huge bonus pools on Wall Street and banking year after year. And issues like décor and jets never rose high enough for discussion.
This willingness to accept the now-derided status quo is a real challenge to shareholder-centric governance, though the corp gov crowd keeps trucking along as if shareholders had been simply gulled all those bullish years, not eagerly complicit. Indeed, even today, with stock prices crawling along a rug-less floor, it takes lecturing from Treasury and a media outcry to convince Citi that the jet was a lousy idea. American taxpayers, argue the corp gov cheerleaders, are acting just like shareholders would if they had real power!
Well, maybe not. After all, no corp gov text would argue that the government was a perfect shareholder. The government has a wide range of interests that only occasionally align with conventional shareholders. The government wants these institutions to heal, to lend, to employ people, to seek the interests of long-lost stakeholders like customers and the community, to rein in risk and act prudently. The key to shareholder-centric governance, at least theoretically, is the pure economic self-interest of homo economicus, usually distilled down to the elixir of share performance, not obeisance to stakeholders. It's as if these banks suddenly inherited a hedge fund investor that owned large slugs of debt and equity, unlike the usual passive equity holder making up the rest of the shareholder group. The hedge fund is very visible, but because it owns all that debt, it's perfectly happy for the firm to skirt, even enter, bankruptcy.
That misalignment isn't that far from what might occur with a nationalization, in which public shareholders would be either squeezed out at very low prices or ghettoized, with even less leverage than usual and a federal "shareholder" calling the shots based more on political, than economic, ends. In fact, while these bailouts may well be necessary, this government's ambiguity of interests poses a big problem for both conventional shareholders and for the government itself. The public expects bailed-out firms to behave in a certain way, not just in terms of spending but also in terms of lending or creating electric cars. But the public also expects the government to get its money back, with interest. Those two desires may prove to be incompatible to everyone concerned.
The bottom line: It's really hard to tell what will make a worse shareholder-as-monitor over the long run -- a collection of disparate private investors or the government. Maybe we simply expect too much from shareholders generally. - Robert Teitelman
Robert Teitelman is editor in chief of The Deal.
Comments
Robert Teitelman has hit upon an important distinction, that it is the "public" which is upset with corporate excess. We do not know what the shareholders think - BECAUSE THEY CAN'T BE HEARD!
Here is a short solution, lets call it an Oelsner solution, to help promote corporate governance: allow shareholders to assign their voting rights; require the transfer agent and registrar (TA&R) for corporations that have publicly issued stock to additionally record the identity of the party holding the “voting rights” of those shares; and require brokerage firms to field instructions from shareholders and transmit those instructions to the transfer agent.
Initially, it might be necessary to limit the amount of additional information required per share on the books at the TA&R. This could be accomplished by requiring potential recipients of voting rights (activists) to be registered, “qualified”, and provided a 5 digit code. In that manner, the increase in computer data per share required to be kept by the TA&R might be limited to one additional 5-digit field.
The first principle is that shareholders be allowed to assign their voting rights to “qualified” activists. The second principle is that assigned voting rights be re-transferable. This would allow the Qualified Activists to transfer voting rights amongst themselves. TA&Rs would be required to record those transfers.
I think the benefit to America will be astounding. I can’t emphasize this enough.
A few well placed ads by United Shareholders of America could turn USA into a clearing house of voting rights, where it would re-assign such votes to industry or company specific specialists, and ultimately, could break CEO stranglehold over their Boards of Directors.