One of the costs of economic downturns seems to be poorly thought out regulations. In the early part of this decade we got Sarbanes-Oxley. And now it seems we’re faced with the threat of having the SEC foist proxy access rules on companies across the country.
The rules under consideration at the SEC now would mandate proxy access for shareholders having as little as a 1% stake in the company, the Wall Street Journal reports. This goes further than even shareholder rights advocates want. The Council of Institutional Investors suggests a 3% stake for two years, rewarding long term holders with extra power. The Vanguard Group Inc. would lift the ownership requirement to 5%.
In general, these squabbles about the “right” level of ownership are indicators that the regulation is a bad idea. This kind of micromanagement of corporate governance probably should be left to corporate charters or, at most, state laws. The federal government has almost no experience in handling this kind of thing.
Far from increasing the power of ordinary investors the move would have left them vulnerable to exploitation by special interests, especially union dominated pension funds. Shareholders don’t really have an interest in companies being more democratic. The cause of shareholder democracy sounds nice because we’ve all been taught that:
- democracy is a good thing;
- shareholders are owners of companies;
- and corporate boards are conflict ridden old boys clubs.
But most of the arguments for shareholder democracy whither in the presence of thought.
What’s more, few shareholders have a subjective interest in the elections of board members, except during extreme cases of corporate failure. One sign of this is that when given the opportunity, shareholders rarely act to reject company proposed directors. This is completely rational on their part because diversified shareholders lack an incentive to become overly familiar with the operations of corporate boards. Because they own a diversified portfolio of investments, their interest lies in a prosperous economy and a rising stock market rather than the governance of individual corporations. They rationally care about the big picture rather than the operation of individual companies.
The rational ignorance and apathy of ordinary investors produces the entirely predictable effect of rendering them vulnerable to special interest exploitation. Agency costs of self-serving managers are a now familiar example of this. And because of our long-standing familiarity with managerial agency costs, we’ve developed various corporate structures, reward incentives and legal frameworks aimed at better aligning investors and managers.
Less familiar—and therefore more dangerous—is exploitation by groups of shareholders who have interests that diverge from ordinary shareholders. Investors lack experience in fending off the self-serving activities of these groups, and there are few legal constraints on their activities.
Anyone who has been paying attention to who was pushing for increased proxy access will not be surprised to learn that labour unions are the primary example of these would-be exploitative special interest groups. Through their pension funds, labour unions are empowered with enormous financial leverage over companies even now. The proxy access reforms would have allowed them to tie their labour negotiations with threats to unseat directors. The predictable result of this would be a transfer of wealth away from ordinary investors to the labour unions.
Proxy access dresses itself in the name of shareholder rights but it is really inimical to shareholder interests.
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