The Securities and Exchange Commission has proposed proxy rules mandating shareholder access under conditions that can be modified by a shareholder majority to make proxy access easier, but not more difficult. From a legal perspective, this Mandatory Minimum Access Regime is so riddled with internal contradictions that it is unlikely to withstand review under the arbitrary and capricious standard of the Administrative Procedures Act A fully-enabling opt-in proxy access rule is, in contrast, entirely consistent with the administrative record developed to date by the agency and is easily implemented without delay.
From a political perspective, and consistent with the agency capture literature, the Proposed Rules are easily explained as an effort to generate megaphone externalities and electoral leverage to benefit constituencies allied with currently dominant political forces, even against the will of the shareholder majority. Viewed from this perspective, the Proposed Rules have nothing to do with shareholder wealth maximization or optimal governance, and reflect a traditional contest for economic rent common to political brawls in Washington D.C.
From an economic perspective, if the Commission nonetheless determines to implement an opt-out approach to proxy access, it will then confront the difficult problem of defining the optimal proxy access default rule that should be subject to a symmetric opt-out by shareholder majority (not the asymmetric opt out imposed by the Mandatory Minimum Access Regime, for which there is no support in the academic literature). The administrative record currently contains no information that would allow the Commission objectively to assess the preferences of the shareholder majority regarding proxy access at any publicly traded corporation. To address this gap in the record, the Commission should, if it determines to follow an opt-out strategy, conduct a properly designed stratified random sample of the shareholder base, and rely on the results of that survey to set appropriate default proxy access rules. The Commission’s powers of introspection are insufficient to divine the value-maximizing will of the different shareholder majorities at each corporation subject to the agency’s authority.
Monday, May 03, 2010
Democracy Part XX: Mass Democracy and Shareholder Democracy--The Aristocratic Impulse in Corporate Governance
Joseph A. Grundfest recently published an excellent article which provides excellent insights into the ideological wars currently subsumed under notions of "shareholder rights" and "corporate governance." Joseph Grundfest, The SEC's Proposed Proxy Access Rules: Politics, Economics and the Law, Business Lawyer 65(2) (Feb, 2010).The abstract provides:
Id., Abstract. My colleague, Marco Ventoruzzo tends to agree that a less enabling regulation of proxy access, facilitating proxy access by qualified minorities, would be desirable, but views with more skepticism proposals that would leave these matters entirely to contractual freedom and the governing documents of a listed corporation. In an excellent paper, he has argued that a mandatory form of proportional representation of shareholders on the board might be welcome. Ventoruzzo, Marco, Empowering Shareholders in Directors' Elections: A Revolution in the Making (February 24, 2010). Penn State Legal Studies Research Paper No. 4-2010; Bocconi Legal Studies Research Paper No. 01-10; ECGI - Law Working Paper No. 147/2010.
While the article focuses on what appears to be a technical issue, the ideological points it raises on changes to the sort of ideology embraced by academic elites and government functionaries are worth considering.
I have been following these recent efforts to import public law notions of mass democracy (and its ideological baggage) into corporate governance over the last decade. I remain suspicious. First, most of these proposals (from executive compensation caps to the management of proxy access rules) have the feel of gesture rather than substance--the point, of course, of the more precisely oriented Grundfest article. Second, it is not clear whose interests are served by the rules--certainly not the day traders and the small holders. More likely the interests of larger holders are advanced, holders whose own interests may not be identical to those of small holders. For a valuable consideration of this argument, see Lee Harris, Missing in Activism, An Empirical Analysis of Retail Investors in Corporate Elections, forthcoming in the Columbia Business Law Review, No. 1 (2010) ("When it comes to the interests of retail investors — i.e., individuals with small stakes in a particular firm — the evidence suggests that contested corporate elections are virtually off-limits as conduit for activism. Retail investors almost never launch a campaign and their interests are not represented well by those who do." Id., abstract ).
If this is a possibility, then it might follow that stable minority holders and large institutional investors profit--from governments, and interest oriented private investment funds. The Norwegian Sovereign wealth Fund and CALPERS are among two of the most powerful activist shareholders, I imagine a coordinated investment activist program from the Chinese is not far behind. See, e.g., Backer, Larry Catá, Sovereign Wealth Funds as Regulatory Chameleons: The Norwegian Sovereign Wealth Funds and Public Global Governance Through Private Global Investment (May 4, 2009). Georgetown Journal of International Law, Vol. 41, No. 2, 2009. We move, then, only to a system in which control aristocracies use the state to manage their division of power to reach "the masses". Those aristocracies will reflect global rather than national economic elites--public and private. That makes the purely national discussion of shareholder democracy somewhat parochial--the shareholder demos and the national demos are no longer either identical nor arranged in a perfect hierarchy in which the a state regulator sits at the apex.
Still, the point advanced by Grundfest and Ventoruzzo (among others) is powerful--even a broadened control aristocracy is "better" when measured against ideals of corporate democracy that in turn is modeled on political democracy currently in fashion. Justice Scalia made a point worth reconsidering in dissent in Austin v. Michigan Chamber of Commerce, 494 U.S. 652 (1990)--shareholders have two choices in the face of disagreement with management--persuade or sell. The state has taken it on itself to determine which of the two objectives it will favor through the aggregate of its regulatory efforts. Even the most technical of measures can shift the balance in either direction. It appeared, for a while at least, that the choice had been made to favor a shift of power to the small investor by favoring markets over management. That choice was implemented through the web of rules that were meant to move towards more "perfect" markets and easier exit (understanding that "perfection" is both problematic, unattainable, and creates its own abuse issues). To the extent that the state favored liquidity and real pricing in markets, it tended to favor the small investor whose economic interests were maximized by the increase over time of her aggregate investment portfolio. If the idea was to sustain broad markets and perfect the small shareholders' exit rights (that is to move toward "perfect" pricing), then it seems odd to try to tinker with this system in order to reach a different--and importantly perhaps inconsistent--objective--greater participation by powerful blocks of shareholders. As between directors and large owners, there is an elements of democracy in these movements; as between small and large shareholders, the reverse may be true.The movement now, it seems, is to use the state to favor the larger investor through these management oriented regulatory programs and "democracy" movements.