The Debate Over Shareholder Democracy
Corporate governance issues can quickly divide directors, management and shareholders. For years there has been a continuing debate over the efficacy and importance of shareholder democracy.
In theory, and using loaded political words, like “democracy,” activists who promote shareholder democracy usually have strong talking points. Shareholders own a company. Directors and senior managers act as agents for the shareholders/owners. Directors have fiduciary duties to the company and its shareholders. Everyone agrees on one thing – corporate actors are committed to maximizing shareholder value.
Corporations, however, are not the same as political institutions in the United States (Don’t worry I wont quote 2012 Presidential candidate Mitt Romney, when he stated that “Corporations are people too.”) In fact, corporations are entities designed to promote shareholder wealth and maximize use of corporate assets in the marketplace.
The shareholder democracy movement has had some minor victories in the last few years in response to the financial scandals of 2008/2009. The SEC has adopted rules promoting proxy access for shareholders to propose director slates, for say-on-pay CEO decisions, and corporate directives on specific issues.
Shareholder activists have embraced proxy opportunities to gain leverage. It is no accident, however, that former corporate raiders like Carl Ichan have transformed themselves into corporate activists looking out for the best interests of shareholders. In some cases, so-called activists are merely seeking short-term leverage and changes in ownership positions designed to collect on quick payoffs. In other cases, however, shareholder activists, even with non-binding authority to dictate corporate decisions, have had some positive results.
For example, recently corporate shareholders were able to disagree with a proposed pay raise for British Petroleum’s CEO, Bob Dudley, and BP’s board backed off the proposed pay raise for Dudley. Proponents of shareholder democracy have pointed to shareholder activism as a way to regulate corporate boards and institute changes in response to poor board performance.
Opponents of shareholder activism often cite the requirements for independent directors on corporate boards as a more effective safeguard against poor board member performance. Again, the theory underlying independent directors is that they are better able to take on directors who need to be replaced and improve overall corporate governance.
Like most issues, the concept of shareholder democracy has its plusses and minuses. There is no one answer to the difficult questions that come up surrounding this issue.
Corporate governance experts often cite studies showing that shareholder activism and replacement of board members pursuant to shareholder proposals does not necessarily improve overall corporate performance. Such studies, however, would have to be carefully crafted to isolate the impact of a new slate of corporate directors and the absence of other possible factors to explain any improvement in corporate performance.
Shareholder democracy has increased resistance to staggering of board terms as a way to entrench board members or resist lucrative takeover proposals that board members may oppose and shareholders may support.
However you may feel about the concept of shareholder democracy, the issue requires careful analysis free from political influence and terminology generally used in political debates. Corporations are not political institutions; they are business organizations designed to promote sustainable profitability and performance. With this focus in mind, the debate will continue, shareholder activism is here to stay, and corporate boards will have to address these concerns.