In 1992, after 25 years as a civil engineer for the City of New York, Phillip Goldstein and partner Steve Samuels co-founded what is now Bulldog Investors, a value oriented investment firm that focuses primarily in closed-end funds, small-cap operating companies and SPACs. Goldstein is a veteran of numerous proxy battles and has served as a director of a number of closed-end funds. He is currently a director of the Mexico Equity & Income Fund, ASA Ltd. and Brantley Capital Corp. Goldstein is widely-quoted on topics involving closed-end funds, hedge funds, value investing, investor activism, corporate governance and securities regulation.
By Phil Goldstein
What is fundamentally wrong with corporate governance in America? In a nutshell, it is difficult for stockholders to hold management accountable for its misdeeds.
This is not a new insight. In 1776, Adam Smith wrote in The Wealth of Nations: "The directors of such companies, being the managers rather of other people’s money than of their own, will not watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. Negligence and profusion therefore must always prevail in such a company."
Let's fast forward to 1934. Here is what Congressman Lea of California said in the Congressional record of May 1, 1934:
"In the main, the men controlling these great corporations are not large owners of the stocks of the corporations they control. Too often they have yielded to the temptation to control these great business institutions to their own interests, and with a zeal out of proportion to the loyalty they have shown their stockholders. Thus in recent years we have seen the directors of corporations, without the knowledge of their shareholders, voting themselves vast bonuses out of all proportion to what legitimate management would justify. We have had revelations of salaries paid to directors and officers of great corporations which showed shameful mismanagement; which showed that the men in charge of some of these corporations were more concerned in managing its affairs for their own benefit than for the benefit of the stockholders."
It is now 2008 and it is fair to say that the lot of shareholders has hardly improved, considering the trillions of dollars in lost shareholder value over the last year, along with the egregious bonuses and salaries paid for this dismal performance.
Next year, the Securities and Exchange Commission, for the umpteenth time, is likely to reexamine the rules governing proxy access, which have historically been weighted heavily in favor of incumbent management. Better proxy access would make it easier for shareholders to place director candidates and resolutions on the ballot for vote at annual meetings.
Once again the SEC will be inundated with comments from management advocates insisting that nothing is broken. It will also face a barrage of comments from those that see corporate elections as a way to advance causes unrelated to enhancing shareholder value.
Here is my two cents.
It is irrefutable that the proxy rules have failed to achieve their goal, i.e., "to give true vitality to the concept of corporate democracy." A corporate election today remains largely an empty exercise.
The problem is not that shareholders cannot nominate candidates for director. It is that those nominations must be presented at a stockholder meeting and that most shareholders find it inconvenient to attend these meetings. Hence, the vote at meetings of public corporations is predominantly via proxy.
Since the corporation's proxy card does not include all bona fide nominees, shareholders that do not attend the meeting have no practical means to cast their votes for nominees other than management's.
The solution is to ban "one party" proxy cards. Such a proxy card frustrates the free exercise of voting rights, since it results in the "election" of directors who might not otherwise have been elected if shareholders received a proxy card that listed all bona fide nominees.
What is a fair corporate election? The standard for such an election was set forth in the 1987 Delaware Chancery Court decision in Aprahamian v. HBO & Co., 531 A.2d 1204, 1206-07:
"The corporate election process, if it is to have any validity, must be conducted with scrupulous fairness and without any advantage being conferred or denied to any candidate or slate of candidates. In the interests of corporate democracy, those in charge of the election machinery of a corporation must be held to the highest standards in providing for and conducting corporate elections."
Tinkering with the current fundamentally unfair corporate election process is futile. Instead, the Commission should look to Section 481 of the Labor-Management Reporting and Disclosure Act of 1959, which is the federal standard for electing officers of labor unions. Section 481 states:
"Every member in good standing shall be eligible to be a candidate and to hold office (subject to . . . reasonable qualifications uniformly imposed) and shall have the right to vote for or otherwise support the candidate or candidates of his choice, without being subject to penalty, discipline, or improper interference or reprisal of any kind by such [labor] organization or any member thereof."
By substituting "shareholder" for "member" and "corporate" for "labor," the SEC can craft, interpret and enforce proxy rules that will afford shareholders of publicly traded corporations the same level of voting rights as union members.
Specifically, the Commission should immediately take the common sense position that a proxy card that excludes the name of any bona fide nominee known to the soliciting party is materially misleading.
Even the pro-management Committee on Federal Regulation of Securities of the American Bar Association's Section of Business Law Disclosure has advocated the use of a fair proxy card. In its January 7, 2004 comment letter to the SEC, it said:
"Disclosure on the proxy card should be clear and uncomplicated so that the voting decisions by shareholders will in all cases represent an informed judgment. Furthermore, the structure of the proxy card should be neutral in terms of the ability of a shareholder to vote on an informed basis."
Interpreting rule 14a-9(a), the anti-fraud proxy rule, to require every proxy card to include the name of every known bona fide nominee for director will go a long way toward achieving the goal of vitalizing "the concept of corporate democracy."
Over the years, the Commission has spent far too much of its resources on baby steps that have failed "to give true vitality to the concept of corporate democracy."
Shareholders already have the right under state law to propose nominees for director. But they need a mechanism to effectively utilize that right. In short, they need to be provided with a proxy card that includes all bona fide nominees.
Shareholders have waited seventy-four years for the Commission to fulfill the will of Congress by adopting rules to "[prevent] the recurrence of abuses which . . . [had] frustrated the free exercise of the voting rights of stockholders." Isn’t that long enough?
Interpreting rule 14a-9(a) in accordance with the principles set forth in Section 481 of The Labor-Management Reporting and Disclosure Act of 1959 would go a long way toward making "the free exercise of the voting rights of stockholders" a reality and almost certainly would be upheld by a court as a valid exercise of the Commission's rulemaking authority.
Implementing this reform will not cure the sorry state of management accountability to shareholders because millions of dispersed investors are still no match for a well organized and highly motivated corporate lobby. But it is a start.
Dear Mr. Icahn,
I mean this more as a letter than as a post. I thought that if I posted it on the site, it might get to you. I assume you do have all posts "moderated", that is read by someone. I hope that they will be impressed and forward this note to you.
First, I want to thank you for the talk you gave at the Value Investor Congress in New York in October. I thoroughly enjoyed your talk, and am incredibly enthusiastic about your proposals to improve corporate governance. Having been an investor for many years, I was acutely aware of the abuses by corporate boards and management, but had never realized the role that regulators play. I suspect that many other investors would be excited to discover that these problems might be fixed.
Second, I want to congratulate you for tackling the problem of abuses by boards and executives at our large corporations. The problem, as you point out, is not that our executives are greedy - everyone is greedy as Adam Smith pointed out long, long ago - it is that our regulators and legislators have built a system that isolates the management of our firms from the true owners, the shareholders.
The difficulty with the task you have taken is pretty well stated by Phil Goldstein in his post today on your site:
"Implementing this reform will not cure the sorry state of management accountability to shareholders because millions of dispersed investors are still no match for a well organized and highly motivated corporate lobby. But it is a start."
I write today mainly to tell you about a crazy idea I have to leverage your efforts to solve the problem that Phil stated so well.
The issue for shareholders is not, "what is the problem?", The problem is clearly that managements and boards have regularly built self serving governance structures that do not follow the will or interests of shareholders (not to mention those of the employees or the public). The problem is how to fix the abuse. Your genius is seeing that it is getting our public servants to see that they have the power to fix the problem of abuse by corporate executives and to make it in their interest to fix the problem. They need to see that it will not require an increase in the expenditure of public funds, nor will it lose them the votes of the public. It will, to be sure, lose them the favor (and money) of a large set of lobbyists. In this statement, our problem , then, is how to convince public servants that they should give up the money they are getting from business lobbyists and make them fear that another group will endanger their reelection if they do not fix the regulations and the regulators.
My proposed solution is that we give them concrete evidence that massive amounts of voters care about this issue and fund enough lobbyists on the side of shareholders to offset the money they get from the bad guys.
Stated this way, the problem reminded me of the recently completed presidential campaign. If you were a talented, well spoken, and charismatic politician who was little known, how could you become the President of the United States? Seems impossible. Many hundreds of millions of dollars must be raised, and you must get millions of volunteers organized to get out the voters who would vote for you but don't usually go to the polls. We just saw a little known, black, politician beat the two largest and most powerful political organizations in recent history. How could this possibly happen? Well, I guess you might get someone like Bloomberg to fund your campaign and someone else to build the organization,.....but wait, that wouldn't work. As soon as it got out that you were getting all that money from one person, the NYTimes would roast you and your supporter for trying to buy the presidency. This actually happened to Eli Broad when he tried to get real educators elected to the Los Angeles County School Board. (It was the LA Times who did the roasting in this case)
The organization part Mr. Obama knew from his Chicago days. (It's ironic that Ms. Pallin ridiculed his experience as a community organizer, not realizing this experience would insure that she didn't get elected.) The fund raising part he adopted after watching an unknown Democrat make tremendous progress in 2004 by raising money via the web directly from prospective voters. And he used the same web based system to recruit an army of volunteers to do the spade work on the ground in the days before the election. Think of it. He raised more money than both presidential candidates in 2004 combined - mostly from small contributors, who he then recruited to overwhelm the wonderful Republican "get out the vote" machine. (I am aware that President Elect Obama got many large individual contributions as well, but he is certainly less beholden to special interests than any president since 1960.)
What does all of this have to do with the problem of our corporate boards? Well, to solve that problem, we have to get public servants on our side. To what do they respond? Only two things in my judgment. One, money given to their campaigns (and more repugnant forms in some cases). Two, they can be responsive to large numbers of voters who frequently and loudly complain to their representatives. Can we do these two things?
It does seem daunting. But think about President Elect Obama. What did he need? 20 million people who would back him with small contributions and volunteer labor. Does that seem too hard? On the face of it, it certainly does. 20 million sounds like a lot of people.
How many investors are there in the United States? I didn't do a great deal of digging, but I saw several references to the fact that there were 93 million investors in the stock market in 2002 and that the number was growing 3-5% per year. Thus it seems clear that there are 100 million people in the US who own stock in some way. I suspect that at least half of those either have the money in a retirement fund or own mutual funds so they are not particularly savvy investors, nonetheless, their interests are clearly aligned with other shareholders and most of them are aware of the decline in their holdings in the last year.
Would it be possible to leverage your present web presence to recruit these shareholders into the cause? My guess is Obama started by building a database of email addresses of potential recruits in any way that he could, and then used that and advertisements to leverage that list into a very large list of email addresses of folks who might be recruited to the cause. It doesn't sound easy to build a large list of email addresses of shareholders, but it doesn't sound impossible, either.
To what would these people be recruited? Well, first, they could all write their legislators in both the state and federal governments. The web site could provide sample emails and addresses of legislators. You may recall that when the TARP plan was first presented to congress, there was an incredible outpouring of sentiment from voters to members of congress. It made if very hard for senators to vote for the plan. I suspect that Republican members got more of this mail than did Democrats. It doesn't seem likely that the Chamber of Commerce lobbied against the bail out. If we had even 20 million voters writing their legislators and lobbying for reform of corporate governance regulations, it would have an incredible effect, wouldn't it?
The we'd have to ask them for money to make the case, partially for advertising, but mainly to hire lobbyists for our side. If 20 million people each gave $100 (not a great deal for a shareholder, eh?), we could make some real impact on Congress. Even $10 would make some noise.
Finally, it occurs to me that this is a particularly good point in time to try to move public opinion in the direction of better boards and better management. Democrats almost all are aghast at the what they see as abuses by executives. They only see the money, but any effort to make executives more accountable would seem to be an easy sell to all parts of the political spectrum. If you think about it, the members of the Chamber of Commerce and the very senior management at our corporations are a pretty small group compared to the number of shareholders. So, while they have held the upper hand in funding, it does not seem out of the question that one could leverage the web to overwhelm their advantage. Certainly in numbers of letters to Congress, certainly in other volunteer efforts, and even close enough in funding to prevail. It is heartening to me to realize that these reforms are not just in the interest of those of us who are fortunate enough to own stock, but also in the interest of all Americans as it will make our corporations more productive and thus they will deliver more to workers and management, and they will be more competitive with companies outside the US.
Many years ago, I was part of a group doing an executive hire and I was very impressed by a candidate who, when asked whether they had lots of good ideas replied that she thought that good ideas were a dime a dozen, what was rare was a person who could pick appropriate ideas and actually implement them. So I am aware that having an idea is but a little tiny piece of the puzzle. But I am also aware that you have a long record of getting things done, so it is with at least a little bit of hope and a lot of humility that I suggest this idea to you.
Cheers,
tas
Posted by: Thomas A. Slobko | December 17, 2008 at 04:20 PM