01 October 2007

Changing the Proxy Rules III

As I noted at the end of yesterday's comment, I'm all in favor of the Second Circuit's AFSCME decision, ands in favor of letting it stand, allowing the sort of meta-election now under consideration, not despite the possibility that it will prove a slippery slope, but largely because it might.

By itself, this is a small matter. I can't imagine a lot of election-rules tinkering breaking out in corporate America as a result of anything the SEC does or doesn't do, nor do I think a lot of good would be accomplished it it did.

Still, the shareholders own the company, and it is good to remind the company management, their employees, of that simple fact.

Managements tend to entrench themselves, to seek safety behind various procedural barriers. They like "staggered boards," for example. In this gambit, the shareholders are allowed to vote in or out only one-third of the boards at any one meeting. They justify this by talk of preserving continuity and experience, etc. But the empirical research shows that shareholders don't benefit from that continuity in any way that would show up in, say, the value of a company's stock.


When challenged on their responsiveness to their shareholders, or lack thereof, incumbent boards and their apologists, the advocates of entrenchment, or of what one scholar calls "directorial primacy," like to say that if shareholders aren't happy with how the company is run, they can always sell the stock. They shouldn't have to, though, That's the point. They're owners, not renters.

If you live in a home with a leaky roof and you don't like it, you canmove. The owner can then either fix the roof or find another tenant who'll tolerate the leak. Even if its your home, you might of course decide that fixing it is too much trouble, in which case you can sell.

But you, as owner of equity, also have the option of hiring a contractor who'll fix the roof. And if your contractor proves dilatory in doing this job, of firing him and hiring another. That's what shareholder activism is all about, and why the AFSCME decision should (a) stand as law, and (b) prove the start of something broader.

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Knowledge is warranted belief -- it is the body of belief that we build up because, while living in this world, we've developed good reasons for believing it. What we know, then, is what works -- and it is, necessarily, what has worked for us, each of us individually, as a first approximation. For my other blog, on the struggles for control in the corporate suites, see www.proxypartisans.blogspot.com.