The ongoing global economic crisis is shaking corporate boards
When stock prices and profits seemed to defy gravity, shareholders’ meetings resembled American political conventions: a show to promote a company’s image, rather than a forum to debate contentious issues. This year’s round of annual general meetings has been different. Frustrated by low returns, investors are much feistier.
At Credit Suisse and Barclays, for example, more than a quarter of shareholders rejected the pay package proposed by management. At Citigroup, a majority of shareholders rejected managers’ pay – the first S&P 500 company at which that happened. Shareholder activists can also claim other (at least partial) victories at Yahoo!, where a shareholder activist forced the newly appointed CEO to resign for falsifying his educational credentials.
Lawyers of the round table
Many commentators’ hyperbolic depiction of a ‘shareholders’ spring,’ with its resonance of ousted Arab dictators, is inappropriate for several reasons, notably the fact that the Arab Spring actually toppled regimes. At the moment, the current shareholders’ revolt is failing to achieve any significant result.
For starters, the votes on company mangers’ pay are non-binding. To be sure, compensation committees and boards tend to follow shareholders’ wishes, even if they are not legally obliged to do so. But they do so mostly out of embarrassment and a sense of guilt, and the changes can be entirely cosmetic.
This small victory turned into a major defeat for shareholders when the SEC, rather than performing such an analysis and re-proposing the rule, chose to stall.
For example, after receiving only 43 percent of shareholders’ support, Bruce Gans, an independent director of Hospitality Properties Trust, resigned. The company then quickly invited him to rejoin the board, filling the vacancy created by his own departure.
When describing shareholders’ struggle to make board members accountable, the right analogy is not necessarily the Arab Spring, but the protests at Beijing’s Tiananmen Square two decades ago. In 1989, the Chinese government sent in the military to repress the country’s pro-democracy movement. In a similar vein, the Business Roundtable, composed of CEOs of major US corporations, has deployed brigades of lawyers to squelch shareholders’ aspirations.
A speedy retreat
One of the (few) positive achievements of America’s Dodd-Frank legislation, enacted to address the causes of the financial crisis, is – or should have been – the requirement that the US Securities and Exchange Commission (SEC) repeal the rules that prevent institutional investors from appointing their own representatives to corporate boards. In fact, the requirement was very timid, posing so many restrictions in terms of quantity and length of ownership as to leave the bar to institutional investors effectively in place.
Still, it was too much for the Business Roundtable, which sued the SEC to stop it from happening. Argued by Eugene Scalia, the son of US Supreme Court Justice Antonin Scalia, the case against the SEC was won in the US Court of Appeals, DC Circuit, on a technicality – the SEC’s failure to conduct a cost-benefit analysis ahead of time.
This small victory turned into a major defeat for shareholders when the SEC, rather than performing such an analysis and re-proposing the rule, chose to stall.
At a conference last December, I asked SEC Chairwoman Mary Schapiro when her agency was planning to reintroduce the rule. I even offered to do the cost-benefit analysis for free. But she confessed that the SEC had many other items on its agenda, and had placed the issue on the back burner – a polite way to say that the SEC, like the heroic students in Tiananmen Square, had surrendered under irresistible pressure.
What is disconcerting is that the violent repression in Tiananmen Square set back China’s move toward democracy by at least 20 years. Let’s hope that the contest between the Business Roundtable, their allies and the SEC does not mean the same thing for shareholder democracy. This is not a shareholders’ spring: it is the winter of their discontent.
© Project Syndicate 1995–2012
