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Absurdity of Corporate Board Elections

This country's corporate democracy – the primary mechanism of which is the election of a company's board of directors – is ineffectual. Every year, a company will circulate a proxy statement to its shareholders for their vote on a slate of board nominees, but those nominees are nominated by the board, and they nominate themselves or others that they deem to be "qualified."

It is possible for a shareholder to nominate directors, but the company does not have to include these nominees in the company's proxy statement. In an attempt to elect nominees to the board in a proxy fight a shareholder is forced to comply with arcane rules for prior notification and to prepare and circulate his or her own proxy statement at great expense. A proxy fight can cost millions of dollars out of the shareholders pocket.

Faced with a contested election for the board, management will spend the company's money (the assets of the shareholders) fighting to reelect themselves and their handed picked nominees. To add insult to injury, it's likely that the company has a staggered board In this case, even if the shareholder wins seats, the representation will not be the majority required to enforce action thus necessitating another proxy fight the following year. Occasionally newly elected directors, even if a minority of the board, are able to sway the incumbents. However, this is often very difficult to achieve – trust me, I've been there.

The process is akin to the President of the United States anointing himself as his party's nominee for re-election and then accessing unlimited public funds to run the election campaign. He then runs against candidates that must finance their campaigns from their personal assets. The current corporate election process of our public companies becomes more unconscionable when one considers how difficult it is to remove a director that is not satisfactorily performing his or her duties. But the removal process is a post for another day.

In the last several years, the Securities and Exchange Commission has paid lip service toward improving the process, but no real progress has been achieved.

American Federation of State, County & Municipal Employees, Employees Pension Plan v. American International Group, Inc., determined that, based on a prior SEC rule, a company should be required, in specific circumstances, to include shareholder nominees in the company's proxy materials. An October 2007 SEC proposal questioned whether the rule of that case should be permanently included in the SEC requirements for proxy statements of public companies. Unfortunately the decision issued by the SEC did not adopt the changes.

This was not the first time the SEC has addressed this issue. In April of 2003, the SEC piloted a study of "current proxy regulations … to develop possible changes ... [to] improve corporate democracy"; including "possible changes ... regarding procedures for the election of corporate directors. Again, the result was to continue to deny shareholders the right to include their nominees in the proxy statements of the companies they own. Notwithstanding the actions of the SEC, attention continues to focus on shareholder access to corporate proxy material for shareholder nominees and other proposals.

Recently institutional investors have sanctioned so called "majority voting" proposals and they have been adopted at many companies. These proposals take different forms but they are generally designed to deny board membership to directors that fail to receive a majority vote of shareholders, thus making it possible to target board members through "withhold the vote" campaigns. While majority voting proposals are helpful, they do not remedy the absence of legitimate shareholder access to proxy materials and proper recognition of the role of shareholders as the owners of our public companies

The fact that we shareholders, the owners of public corporations, are legally prohibited from including in the company proxy materials nominees for the board of directors of OUR company but directors of the company (whose compensation is paid from corporate assets) are permitted to do so is unfathomable. To then allow them to spend our corporate assets in the support of their election to the board is such a ludicrous concept that its very utterance proves its impropriety. To allow entrenched corporate interest to sustain this anti-shareholder regime is outrageous. The time for change is long overdue.

Comments

Great information. I especially appreciated your reference to US law regarding election finance rules.

Thank you for the great write-up!



"The process is akin to the President of the United States anointing himself as his party's nominee for re-election and then accessing unlimited public funds to run the election campaign. He then runs against candidates that must finance their campaigns from their personal assets."

While I shouldn't bang on about politics too much on a blog about corporate governance, this is exactly what happens in the UK, and I doubt other countries are much different. No serious candidate challenges an incumbent Prime Minister (nowadays equivalent to the President) of his own party, as it would be seen as hideous disloyalty. PMs are only fired after losing general elections. And public funds are constantly used for election campaigning; you simply put leaflets through letterboxes, purportedly in the name of the police or the health service and using their PR budget, telling everyone how marvellous everything has become recently. You carefully avoid any mention of the political party, of course, but it's not like people don't know who's in power.

The moral of this is that any democratic bureaucracy operates in a similar way. Keeping the guards away from what they're guarding is physically impossible, even if, as in the election system, you put up safeguards to prevent it. After all, they've got all year, on someone else's salary, to figure out ways of getting past the doors they're guarding. It's obvious that public companies have even fewer safeguards than democratic governments.



You make a highly interesting point, but I am uncertain how the current method of not including opposition candidates in the official proxy materials could be effectively altered. If any given shareholder could propose candidates for the board that would have to be included in the official materials, then we have the obvious problem that the proxy materials could balloon to an absurd and impractical size.

I can think of a few different avenues to address this difficulty but I would be interested in knowing if you had any in mind. At any rate, kudos for taking a stand against boards that obviously have no interest in maximizing shareholder value.



Forty years of observation of the business world and society in general convinces me that the root of all evil is evil. All problems stated here; and most all the ills of today can all be summed up by the _moral decay_ of the past 60 years. America will always be GREAT as long as she is Good. The party is over; time to clean up the mess.



What should happen is a democratic nomination process where every nominee that receives, say, 8% of shareholder votes is put onto the ballot with a summary of which major (>=2%) holders put him there. That way a shareholder that owns 10% of the company who be guaranteed a nominee for each seat and the other shareholders could easily choose to rally around a like minded investor.

Also, shares awarded to management should be non-voting. The biggest shareholders in a company are often the management because that is part of their compensation package. But that allows management to control the board which is supposed to be overseeing them. This is an obvious conflict of interest.



I remember once when I was a young, first-time investor, getting a proxy vote in the mail for one of the companies in which I owned shares. I was very frustrated with the obscurity of the annual reports (I REALLY DID try to understand them) and the absurdity of voting for someone I had heard nothing about, going only on the board's recommendation. I "called" my vote in (an option) instead of sending it in and voiced my complaint to the person on the other line. They had no idea what to tell me. They knew it was absurd but had no answer. It was then that I started to realize the great obfuscation game that is corporate America. I am very, very discouraged with the state of things. We need some kind of "populist" revolt (an insulting label), in the American tradition. Please Carl, keep going. Yours truly, Constance



CS Lewis wrote, that competitive pride is the root of all evil. If my pile of stuff is bigger than your pile of stuff, then I am better than you.

The years of deception are over, the Emperor has no clothes and he's damn ugly, to put it mildly.



By R Raymond May

I was asked at a neighborhood get together in November 2008 for my opinion on what was the root cause of this fine mess we find ourselves in. Interesting, everyone knows it was all caused by the collapse in house prices and the sub-prime mortgages debacle! or was it?

No I said, those were only the first symptoms, the root cause was the wholesale institutional culture of corporate theft that has taken hold. The most clear cut sign is the incredible levels of CEO pay, golden parachutes and most of all pay levels on Wall Street. 17 billion dollars for the 2007 Goldman Sachs bonus pool! Almost equal to the company’s current market capitalization.

One group of the stakeholder club – “management” holds all the cards. The others - Capital, employees, community take what management gives them.

The only check and balance on management is the Board of Directors. But how is the board put into place and who checks the board? Certainly not the shareholders, but no, it is the same shameless management.

In response to the corporate scandals in 2001-2002, the major U.S. exchanges came up with new director and committee independence requirements, which are intended to enhance board oversight. We use this regulation event to shed light on the effect of board structure on CEO compensation. We find a significant decrease in CEO compensation upon compliance with these requirements. The significant decrease in compensation is due to a decrease in the option-based portion of the compensation. The results suggest that board structure is a significant determinant of the size and structure of CEO compensation.1

Corporations are so big, and the amount of cash available is just too temping. I remember thinking out loud as a young trader on Wall Street "why are we paid so much?" My boss the future CFO of JP Morgan replied "it is because we are so close to all the money."

During my time on Wall Street I observed two types of people. Type 1 had the corporation, group or businesses interests in mind foremost. Type 2 only had their own interests at heart. Types 2 were definitely the majority and you hoped you did not have to work for one of them. The business seemed cyclical in terms of which type was dominant.

Clearly this mess was caused by the gradual prominence of type 2s. What is the purpose of owning stock in a company where all returns go to management? Why own a company where the number of shares increases at the same speed as profits just to be given to management?

As the US government agrees to bailout Citibank all the talk on the TV shows is on the removal of the Board! but even if we wanted to how would that happen? And how would a new board be selected?

We need real democracy in the selection of Board of Directors!

1. Chhaochharia, Vidhi and Grinstein, Yaniv,CEO Compensation and Board Structure(October 2006). Available at SSRN: http://ssrn.com/abstract=901642
2. http://www.icahnreport.com/report/2008/06/corporate-board.html



Excellent article.

I have seen that happen with way too many companies here in Canada, including one of my former employers. It is quite frustrating to see the CEO and the Board get a hold of a company owned by the shareholders, and turn it into their little private fiefdom. Then they grant themselves stock options, perks, golden parachutes, etc. at the expense of shareholders.

It almost makes me think it would be better to have a short interest on these companies, to get back some of the shareholder money they grant themselves through options and bonuses.



Why invest? Why put your hard earned money into the welfare fund of the all powerful boards and management.

They are licensed to steal.

State laws protecting management must be changed by federal laws giving shareholders the right to curb excesses in management pay. And management's shares (which were stolen from the company) must not be voting.

Corporate rulers gamble for enormous reward, but the risk is the shareholders. Managers love to acquire companies making their empires (and compensation packages) larger, despite the fact that share prices of acquiring companies almost always go down.

Its really theft without recourse. No sane person should invest in the stock market unless the laws are changed.



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