The Activist Investor Blog
The Activist Investor Blog
A 12-Step Program to Truly Entrenching Corporate Governance
A response: to a recent typical slam at investor efforts to defend their interests. This one comes disguised as a presumably helpful guide to “good corporate governance” from a behemoth corporate law firm that makes its living entrenching overreaching executives and the complacent directors that enable them.
1.“Start at the Beginning - The Proper Goal...is to Enhance Value Creation.” Or, “...a corporation is an organization, created by law...[to] create economic value.” Actually, in the US a corporation exists to limit liability of its investors. A business organization can take many legal forms, including corporate. But, otherwise who can argue with wanting to create economic value? Let’s agree with this one.
2.“...Analogies to Political, Economic, or Legal Theory are Rhetorical Devices, Not Answers.” These devices include the “bromide[s]” that “shareholders ‘own’ the corporation”, and “directors and management [are] ‘agents’ of shareholders”. How are these bromides, instead of the fundamental principles of corporate governance?
3.“Don’t Base Corporate Governance...on Concerns About Separation of Shareholders and...Managers.” Or, while “the dangers of agency cost remain real (although diminished), it cannot be the whole point of corporate governance.” Yet, governance by definition entails mediating the relationship between investors and managers. What other point is there besides mitigating agency cost?
4.“Don’t Get Caught Up in a Debate Between Short-Term and Long-Term Strategy and Execution.” Ok, we won’t, but we still don’t know how good corporate governance arises from this particular step. Also, within the exposition of this point, though, lies one of the worst defenses of entrenchment: “[unhappy investors] vote...with their feet,” which represents the classic sell-if-you-don’t-like-it response from a failing company, repeated in Step 12 below.
5.“Affirm the Board’s Primary Role as Strategic Advisor and Supervisor of Management, Not as...Preventer of Agency Costs.” Supervising management would prevent agency costs, of course. As for advising management, given the choice smart investors prefer a Board that prevents agency costs, and will let management hire a good consultant for strategic advice.
6.“Limit Board Size...” Couldn’t agree more.
7.“Select Nominees...[for] Competencies...at the Cost of Independence.” Really? Knowingly accept directors that lack independence management? After all we’ve been through in the past few years, with complacent directors allowing Enron, Lehman, and the rest to squander investor funds?
8.“Select a Board...Structure that Works [for] a Particular Board and Management Team.” This heads a typical defense of situations in which the CEO also serves as Board Chair because the Board can’t find a suitable independent director. Search harder, then.
9.“Do Not Fall Prey to...Frequent Shareholder Votes.” Or, boards and management should not be “accountable” more frequently than once a year. No ability to call special meetings or use written consent. Again, entrenchment.
10. “Remove the Clutter of Shareholder Proposals...” While most investors would agree that they could do without the numerous social responsibility proposals, the solution is worse than the problem - allow states to regulate the proposal process. Management-friendly states such as Delaware will inevitably limit or even eliminate these, further entrenching management and boards.
11. “Release Public Companies from...One-Size-Fits-All Governance Policies...” This translates into, release investment advisors from having to vote, and disclose votes on various governance questions. Removing this disciplinary force would remove one of the principal ways in which investors can monitor management and directors.
12.“...Investors Voting With Their Feet is Far More Efficient...than One-Size-Fits-All Corporate Governance...” So, if you don’t like the governance, then sell the shares. The last refuge of a defender of entrenched management and directors.
Corporations would gladly follow this 12-step guide. To the extent that this incoherent laundry list of shopworn “bromides” makes any sense at all, it serves mainly to free their executives from meaningful investor oversight.
Good corporate governance demands attention to some serious, interesting, and challenging questions. We should expect efforts like this that seek to distract attention both from these questions, and from the underperforming management and directors that make these questions relevant.
Tuesday, October 11, 2011