By Robert L. McMahon
Is “proxy access” really the Holy Grail solution to better corporate governance or simply a well masked Trojan Horse to advance social and environmental policies without accountability? Small wonder the discussion centers on the proxy, huh? If there has ever been a topic that makes citizen-investors’ eyes glaze-over and roll-back in their heads it’s having a corporate governance discussion about “proxy-access”. Yes, I know I’m hitting this subject extremely hard, but if anybody wants to know why John Q. Public, and those in the media, cannot seem to follow the ball when having a discussion about why “Corporate Governance” is so important, it’s because all discussions revert to heated and conflated perspectives about the proxy.
Would proxy access have prevented Merrill Lynch from turning itself into a mortgage bank these last six or seven years? Prevented AIG from issuing uncollateralized credit default swaps? Improved our automotive industry; or stopped Citibank from becoming a “financial supermarket”? The answer is no. Discussions about the proxy access, at this point, are equivalent to discussing place-settings as the Titanic is sinking; it’s all form without substance. And although I know and appreciate that having access to the proxy is extraordinarily important, agenda driven special interests are blowing so much smoke we’re unable to see the 800 pound gorilla playing with Grandma’s crystal – the pension and investment managers who actually invest OUR money in the companies that turn into governance disasters.
The bottom-line is that John Q. Public would much rather our professional investment and pension fund managers get more aggressive in seeing the next Enron or AIG on the horizon and not after it has already been slipped into their retirement fund, mutual fund or 401(k); proxy, schmoxie at that point, right? But is that how new legislation being discussed in Washington, and touted by the Council for Institutional Investors (http://www.cii.org/), is framing the discussion? No, of course it isn't.
Senator Charles Schumer is leading a charge in congress to introduce new legislation on May 19th called the “Shareholder Bill of Rights Act of 2009”. The three (3) major sections of this legislation are the following:
· Section 2: Shareholder Vote on Executive Compensation
· Section 3: Shareholder Input in Board Elections
· Section 4: Corporate Governance Standards
Just who, may I ask, are the vast majority of shareholders in America today? They are the large institutional pension and investment management firms of all stripes – public pensions, union pensions, brokerage firms, mutual funds, insurance companies, asset managers, trusts, banks, hedge funds, you name it. Just where to do these “agency” owners fit in the discussion of corporate governance? John Bogle, the founder of The Vanguard Group of mutual funds, has laid much of the blame for what has transpired in corporate governance failures at the feet of these “agency” shareholders that invest vast amounts of OUR money in the companies – “issuers” in governance parlance – that have failed. Let’s ask three (3) questions:
· Did the failures in corporate governance occur because the “issuers” were stiffing access to a proxy and the agency owners couldn’t effect change?
· Were the agency-owners more focused on their own parochial agendas for change and regarded other governance issues as unworthy of their consideration?
· Or were the agency owners not even considering “corporate governance” as a metric to be examined in the investment selection process?
If you’re thinking that delivering a solution for just one of these questions will be a silver bullet, you’re wrong. As I have previously written on my Blog, what we really need are investment and pension managers who act like genuine owners; not just advocates for change or traders.
Actually John Q. Public knows that the problems facing us are more driven by the failures of our pension and investment managers than by simple “proxy access” or beating up on the issuers themselves. If one company is poorly governed and implodes it should come as no great shock to anybody and shouldn’t create systemic risk to the global economy. But since 2000 we have witnessed a near systemic breakdown in all sorts of industries and companies, investors aren’t just chagrined by the corporate disasters, but their confidence has been radically shaken in their investment professionals. The pension and investment management industries are flooded with degreed, chartered and certified investment “experts” who have managed to measure every aspect of a company’s finances and managed to miss how to qualify and quantify corporate governance quality.
Where, in Senator Schumer’s “Shareholder Act”, are the accountabilities and responsibilities imposed on these agency-owners to be more engaged in researching, assessing, monitoring, managing, limiting and disclosing governance risk in the investment selection and oversight process? Why are we going to make this a one way street where large institutional and “political” investment managers and pension funds get to succeed in imposing an agenda on a company, but then exempt themselves from having any responsibility that may cause this company to fail; meaning if you pressured for change to improve overall financial performance due to poor corporate governance, you’re going to need to assess how your changes are improving both performance and governance; otherwise what’s the point? How does the legislation address that Senator?
Likewise, I didn’t see anything in the bill that addresses companies who are either public now or wish to go public later, where they have to offer voting-rights, that dual class stock structures, special class stock, stock with superior voting rights and so forth will be prohibited. There is no mention of imposing new or remediated rules on index companies when they place a company in an index - that will wind up being widely held – that they have to adhere to a particular governance profile. The company that replaced Worldcom in the S&P 500 index in 2002 is Apollo Group, a company that doesn’t offer voting-rights on the Class A, publicly traded shares, doesn’t offer access to a proxy at all, and is controlled by insiders and founders.
Nothing in Senator Schumer’s bill addresses the lack of focus on long-term sustainable investment performance on behalf of the investors. In fact, and I’m going to be pretty bold here, I see it as nothing more than a means for politically favored state and union pension funds to press agendas in social and environmental policies on corporations without any accountability as to whether or not their advocated changes bring about long-term sustainable investment performance and value.
Is “proxy access” really the Holy Grail solution to better corporate governance or simply a well masked Trojan Horse to advance social and environmental policies without accountability? Small wonder the discussion centers on the proxy, huh? If there has ever been a topic that makes citizen-investors’ eyes glaze-over and roll-back in their heads it’s having a corporate governance discussion about “proxy-access”. Yes, I know I’m hitting this subject extremely hard, but if anybody wants to know why John Q. Public, and those in the media, cannot seem to follow the ball when having a discussion about why “Corporate Governance” is so important, it’s because all discussions revert to heated and conflated perspectives about the proxy.
Would proxy access have prevented Merrill Lynch from turning itself into a mortgage bank these last six or seven years? Prevented AIG from issuing uncollateralized credit default swaps? Improved our automotive industry; or stopped Citibank from becoming a “financial supermarket”? The answer is no. Discussions about the proxy access, at this point, are equivalent to discussing place-settings as the Titanic is sinking; it’s all form without substance. And although I know and appreciate that having access to the proxy is extraordinarily important, agenda driven special interests are blowing so much smoke we’re unable to see the 800 pound gorilla playing with Grandma’s crystal – the pension and investment managers who actually invest OUR money in the companies that turn into governance disasters.
The bottom-line is that John Q. Public would much rather our professional investment and pension fund managers get more aggressive in seeing the next Enron or AIG on the horizon and not after it has already been slipped into their retirement fund, mutual fund or 401(k); proxy, schmoxie at that point, right? But is that how new legislation being discussed in Washington, and touted by the Council for Institutional Investors (http://www.cii.org/), is framing the discussion? No, of course it isn't.
Senator Charles Schumer is leading a charge in congress to introduce new legislation on May 19th called the “Shareholder Bill of Rights Act of 2009”. The three (3) major sections of this legislation are the following:
· Section 2: Shareholder Vote on Executive Compensation
· Section 3: Shareholder Input in Board Elections
· Section 4: Corporate Governance Standards
Just who, may I ask, are the vast majority of shareholders in America today? They are the large institutional pension and investment management firms of all stripes – public pensions, union pensions, brokerage firms, mutual funds, insurance companies, asset managers, trusts, banks, hedge funds, you name it. Just where to do these “agency” owners fit in the discussion of corporate governance? John Bogle, the founder of The Vanguard Group of mutual funds, has laid much of the blame for what has transpired in corporate governance failures at the feet of these “agency” shareholders that invest vast amounts of OUR money in the companies – “issuers” in governance parlance – that have failed. Let’s ask three (3) questions:
· Did the failures in corporate governance occur because the “issuers” were stiffing access to a proxy and the agency owners couldn’t effect change?
· Were the agency-owners more focused on their own parochial agendas for change and regarded other governance issues as unworthy of their consideration?
· Or were the agency owners not even considering “corporate governance” as a metric to be examined in the investment selection process?
If you’re thinking that delivering a solution for just one of these questions will be a silver bullet, you’re wrong. As I have previously written on my Blog, what we really need are investment and pension managers who act like genuine owners; not just advocates for change or traders.
Actually John Q. Public knows that the problems facing us are more driven by the failures of our pension and investment managers than by simple “proxy access” or beating up on the issuers themselves. If one company is poorly governed and implodes it should come as no great shock to anybody and shouldn’t create systemic risk to the global economy. But since 2000 we have witnessed a near systemic breakdown in all sorts of industries and companies, investors aren’t just chagrined by the corporate disasters, but their confidence has been radically shaken in their investment professionals. The pension and investment management industries are flooded with degreed, chartered and certified investment “experts” who have managed to measure every aspect of a company’s finances and managed to miss how to qualify and quantify corporate governance quality.
Where, in Senator Schumer’s “Shareholder Act”, are the accountabilities and responsibilities imposed on these agency-owners to be more engaged in researching, assessing, monitoring, managing, limiting and disclosing governance risk in the investment selection and oversight process? Why are we going to make this a one way street where large institutional and “political” investment managers and pension funds get to succeed in imposing an agenda on a company, but then exempt themselves from having any responsibility that may cause this company to fail; meaning if you pressured for change to improve overall financial performance due to poor corporate governance, you’re going to need to assess how your changes are improving both performance and governance; otherwise what’s the point? How does the legislation address that Senator?
Likewise, I didn’t see anything in the bill that addresses companies who are either public now or wish to go public later, where they have to offer voting-rights, that dual class stock structures, special class stock, stock with superior voting rights and so forth will be prohibited. There is no mention of imposing new or remediated rules on index companies when they place a company in an index - that will wind up being widely held – that they have to adhere to a particular governance profile. The company that replaced Worldcom in the S&P 500 index in 2002 is Apollo Group, a company that doesn’t offer voting-rights on the Class A, publicly traded shares, doesn’t offer access to a proxy at all, and is controlled by insiders and founders.
Nothing in Senator Schumer’s bill addresses the lack of focus on long-term sustainable investment performance on behalf of the investors. In fact, and I’m going to be pretty bold here, I see it as nothing more than a means for politically favored state and union pension funds to press agendas in social and environmental policies on corporations without any accountability as to whether or not their advocated changes bring about long-term sustainable investment performance and value.
No comments:
Post a Comment