Corporate CEOs get to pick their boards of directors to monitor them, then pay a lot of money (from shareholders) to maintain the status quo.
Read/watch the full post on Forbes
By Eric Jackson, Senior Contributor
The Securities and Exchange Commission has been very busy over the last few months with concept releases and new proposed rules. So, lost amidst this activity, you might not have realized that today is the deadline for comments about proposed changes to proxy system.
Before your eyes glaze over, let me say that it's actually a very good thing. And, unlike most situations, there is one proposed change under consideration on which both investors and public companies are in complete agreement: ending the monopoly enjoyed byBroadridge(BR_) for counting proxy votes.
By Eric Jackson, Senior ContributorI attended the annual fall meeting of the Council of Institutional Investors over the past couple of days in San Diego. The council is a non-profit organization that exists to represent the interests of American pension funds with combined assets of more than $3 trillion (that's trillion with a "t"). The council's views on how our largest companies are run matter because, unlike many large institutional or mutual fund companies, these pension funds aren't afraid to rock the boat and speak up to corporate management.
09/01/10 - 09:16 AM EDTBy Eric Jackson
RealMoney Contributor
7/30/2010 10:00 AM EDT
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Say, for example, Citigroup (C - commentary -Trade Now) has 12 directors this year. It will typically nominate the same 12 people to be put to the vote at next year's annual shareholder meeting. As there are no other options, the shareholders will usually re-elect the slate of people put in front of them by an overwhelming margin (90-95% is common).
In the current system, if shareholders are angry at the company, as they were, for example, in 2008 after Yahoo!'s (YHOO - commentary -Trade Now) board turned up its nose atMicrosoft's (MSFT - commentary - Trade Now) offer to buy the company, there are only two things they can do when it comes to re-electing directors: (1) vote against the re-election of the company's directors (individually or collectively), or (2) pay out of their own pockets to launch a full-blown proxy contest.
The problem with voting against directors is that it's largely symbolic. In the case of Yahoo!, 30-35% of shareholders voted against the re-election of former CEO Jerry Yang, Chairman Roy Bostock and others -- but nothing happened. Bostock is still Chairman, and the company's stock price is significantly below where it was at the 2008 shareholders' meeting (and a universe away from the Microsoft buyout offer).
The problem with a proxy contest is that it's very expensive to launch. Effectively, by running such a contest, you are coming up with your own alternative list of nominees to send to all shareholders (in addition to the official company proxy they receive). Then, you have to try to convince all those shareholders to vote for your proxy rather than the company's. After mailing costs, lawyer and proxy-solicitor fees, you are looking at a minimum of $1 million, probably much more if you're going to go after a Yahoo!- or Citi-sized company. Therefore, this option is really only attractive to rich, activist-minded shareholders, such as Carl Icahn, who decided to go after Yahoo! in 2008 and later struck a deal with the company to get a few seats on the board.
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If you think market actors are greedy and that the government keeps everyone honest, you support FinReg. If you think the government is made up of incompetent bureaucrats who get in the way of efficient markets and choice, then you think FinReg is terrible.Derivatives OTC clearinghouses
Some estimate that the global market for derivatives is more than $700 trillion. Yet, a large part of it has operated between parties rather than through a clearinghouse. Now, it will and bank profits will go down. I think the system is better off and safer with this change.Resolution authority
Former Treasury Secretary Paulson argued that he never had the "authority" to take over Lehman Brothers. Barney Frank has backed up Paulson's explanation, which is why he strongly supported the creation of this authority process to specifically deal with that one challenge.Proxy access
This bill punted the idea to the SEC to define. Proxy access will determine whether shareholders can nominate directors to appear on the company's proxy statement for all shareholders to vote on at the annual meeting. This is good though. At the last minute, Chuck Schumer, Chris Dodd, and Evan Bayh (all Democrats) tried to water down proxy access by stating that shareholders should have to own 5% of the company's stock for over 3 years before being allowed to make a nomination -- thereby making 99% of shareholders ineligible. I'm grateful that Barney Frank pushed back.A watered down version of Volcker Rule
I supported the Volcker Rule because I saw its intent was to lower the risk of financial institutions by getting them out of proprietary trading with assets that they would not have if not for the depositors' money sitting in "safe" bank accounts. Critics again howled that it wasn't part of the 2008 meltdown. This is one of those issues where I would ask the banks if they want to be short-term rich or long-term rich. Separating the trading from banking will allow all these banks to prosper in the long-term, even if they lose a few pennies in EPS over the next couple of quarters. It's discouraging that the bill version of this rule got watered down.
By Eric Jackson
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| Sen. Evan Bayh (D., Ind.) and wife Susan |
The plaintiffs argue that the PCAOB's board is not accountable enough and must allow for the president to appoint members to the board. Because this is currently not allowed, they argue the whole Sarbanes-Oxley law must be struck down.
Ironically, many companies who support this effort to strike down Sarbanes-Oxley (due to the higher costs of internal accounting oversight), also support blocking their own shareholders from having more of a say on who gets appointed to their own board of directors. What's good for the goose is apparently not good for the gander.
Sarbanes-Oxley's legislation, especially section 404, has been a bugaboo of business -- especially small business -- since its inception. Recall that the law was passed in the wake of the major scandals like Enron, Tyco, Worldcom, Parmalat, and others during the dot-com bubble.
At the time, President Bush and other politicians expressed outrage that so many large and well-known companies could have so easily perpetuated accounting fraud for so long, with no consequences -- until they were forced into the light. Most of these companies went under and, with them, the pensions and 401Ks of many hard-working and innocent executives and employees.
[This excerpt is only the first quarter of the article. To read the entire article on TheStreet.com, click here.]Over the past 2 weeks, I’ve criticized Yahoo!’s Carol Bartz and HP’s Mark Hurd for excessive pay and perks, given their companies’ recent performance. It’s been interesting to read the many emails I’ve received on the articles – mostly from employees of both companies.
A few emails – maybe 5% -- take the CEO’s side and make the case that paying our leaders a lot of money is part of our capitalist system. Their advice to me: get over it already.
However, the majority think it’s crazy that these leaders (more so Hurd because Bartz has only been there since February) have pushed through job cuts and slashed pay for workers and then pay themselves and their lieutenants gobs of money.
One reader who asked “why do people equate corporatism to capitalism?... Corporatism (what people ignorantly call capitalism today) transfers ownership of assets from the individual to the corporation. In pure capitalism, ownership of assets is predominantly held, and kept by, the individual.”
One reader asked me, expressing shock and outrage at how HP’s execs could be flying around on private jets for personal trips on the shareholders’ dime when she knew several former employees now in food lines, “how can this happen that these executives get away with this?” There are many to blame here.
Not many journalists or retail shareholders go through a company’s proxy statement in detail, reading footnotes on each page outlining executive comp. When mainstream reporters cover an executive’s new pay package (like Bartz’ back in January), they typically vastly understate it. Why? Quite simply, it takes a long time to read through and digest all the variables to tabulate a true likely scenario of what someone’s going to be paid over the next year or few years. Most journalists want to pump out a story and move on to the next one – or frankly aren’t trained in how to read all the permutations of a comp table.
If journalists aren’t able to read through these comp tables, is it any wonder that most retail shareholders can’t or don’t?
And, although the SEC has tweaked the requirements for how companies need to report this information, you can’t say the agency has nailed it yet, if the goal was for shareholders to be able to understand the information and act on it when necessary.
There is one group smart enough to know what’s going on in the comp tables, and is in a position to call out CEOs for egregious pay: the analysts who cover the companies. Yet, they won’t, because it doesn’t do them or their employers any good. Even post-Henry Blodget, analysts don’t get bonused for antagonizing CEOs with comfy pay packages. So, they keep their heads down, pump out meaningless price targets, and ask innocuous questions of management during their quarterly calls like “I wanted to get a little more color on your day sales outstanding,,,” or “what assumptions should we make about your tax rate for next year” and – my personal favorite – the obsequious pat-on-the-back “great job, guys.”
The few activist investors left are only going to poke the few companies that they take positions in. They’re not going to call out large numbers of CEOs – especially if they don’t have skin-in-the-game.
Larger institutional shareholders like Barclays Global or Legg Mason or some of the larger pension funds could take this issue on – and sometimes will raise their voice. However, these investors typically have hundreds of holdings. Is it worth their time and effort to stop and publicly criticize Mark Hurd or Carol Bartz? They also tend to shy away from having their comments in the press. So they’ll discuss their views during private chats instead – unfortunately keeping the CEOs self-serving practices from the light of public scrutiny.
Who’s left? Employees, who definitely have a vested interest in seeing a company’s shares increase and calling out internal practices that are hurting a company’s long-term prospects. But these people will not speak up publicly – understandably so – for fear of their jobs.
Then there are labor groups like the AFL-CIO and AFSCME – or Michael Moore for that matter -- who bring up excessive executive pay. Entrenched and overpaid CEOs and their aiders and abeters have been successful in portraying these groups as extremist and thus marginalizing them.
So, how will this problem of enormous executive pay that’s delinked to performance change? After all, we’ve been talking about this problem since at least the early 1980s and it’s never, ever changed. In fact, it’s only become more delinked.
As someone who strongly supports a free market capitalist system – not crony capitalism or ‘corporatism’ as the reader called it – I think it’s the responsibility of shareholders to speak up and put a stop to this. The SEC can help by changing regulations to make it easier -- and closer to a free market ideal -- for shareholders to remove entrenched directors who are not representing their interests in overseeing CEOs and management (such as the proxy access initiative being considered at the moment, which is an improvement over the status quo, but certainly could go further). Yet, it must start at the individual level, with each shareholder -- large or small – speaking up and making their voices heard.
Shareholders who assume they can free-ride off of what Gordy Crawford of Capital Research does (or Carl Icahn or Eric Jackson or whomever) will be playing right into the hands of Hurd, Bartz, and other CEOs who want us all to look away from all the pay and perks they’re getting – whether or not they perform.
I don’t expect employees to be martyrs and sacrifice the financial futures of their families by speaking out. But, with the Web, it’s become easier than ever for people to anonymously – yet with credibility and impact – share their views on a particular topic.
Shareholders also need to learn that, when you gripe about some fat-cat CEO on a Yahoo! Finance message board or a disgruntled employee blog, nothing changes. You have spoken as 1 voice only, and it’s been lost as soon as the words have left your lips. However, when you pool your voices together and speak as a group, it becomes impossible to ignore.
I hope that HP and Yahoo! shareholders (whether employees, retail shareholder or large shareholders), as well as other shareholders being extorted by crony capitalist boards and CEOs, start to channel their voices and put sufficient pressure on them to change their ways. Decoupled pay-for-performance (and extravagant perks) won’t change until shareholders rise up and say “we’re mad as hell about this and not going to take it anymore.”
[Jackson’s fund owns no shares in the companies mentioned in this article at the time of publication.]
Sphere: Related ContentIn response to my recent criticisms of Carol Bartz, her management team, and board at Yahoo!, I've had some people ask me "How can you be against management? Don't you support business and capitalism?"
When did it became assumed that anyone pro-management was pro-capitalist and anyone pro-shareholder rights was pro-socialist?
When I respond that I'm a free market capitalist in the vein of Milton Friedman and Ayn Rand, they seem surprised. I suppose they think that any CEO or executive would be a supporter of Friedman's conservative views - not a pro-shareholder person. Typically, on SEC votes, Republicans line up on the side management and Democrats on the side of shareholders. Isn't that the way it works? No.
I think that any individual -- CEO or shareholder (or Republican/Democrat for that matter) -- is self-interested. That's the whole basis of Friedman's views on the power of individual choice. Yet I don't think of most CEOs/boards/execs in America today as true free market capitalists -- at least in how they govern themselves and hang on to power. I think of them as crony capitalists -- not unlike the robber-barrons.
I don't think any of these individuals are inherently good or bad people, but they operate in a system in which they have found how it can be exploited for their self-interest -- especially when it comes to compensation and keeping the system for nominating replacements to the board as closed as possible. Welcome to Club Crony.
Since the beginning of the corporation, the board of directors was to have supposed to represent the will of shareholders. Yet Berle & Means showed that this intent quickly got side-tracked by management self-interest over the interests of the shareholders. The board was always supposed to take the long-view for the interests of its shareholders -- not do the work of management or make executives decisions by frequent referenda of shareholders. If the board wasn't taking the interests of shareholders in mind, the intent was to allow replacing directors until they did properly represent shareholders' interests. Both Friedman and Rand both recognized this.
Yet, in practice, what's happened is that board members became selected by CEOs (who often revamped the board when they took the job in order to be governed by "their people"). If I put my friend on the board, then promote him to the Compensation Committee, he might qualify for whatever definition of "independent director" you like, but he's still going to be my buddy and probably more generous to me in my compensation than if he was some 3rd-party.
Besides picking my directors to govern me as CEO, I can influence the compensation they receive. Therefore, if I wish, I can ensure they get paid a lot. If they're happy with receiving a lot of comp, maybe they will keep paying me a lot. It becomes a mutual admiration and back-scratching society.
The slate of directors runs every year unopposed. Most shareholders (especially retail) are apathetic and don't vote anyway.
If a shareholder wants to run a proxy contest against us, they have to pick up the tab for doing so, while we can use our shareholders' money. If a shareholder wants to sue us, our D&O insurance protects us from any liability (paid for again by shareholders) and the shareholders will also pay our top drawer NY lawyer fees.
This wasn't how it was supposed to be. Management's insulation from being held accountable to shareholders promotes waste, not efficiency; mediocrity, not innovation; wealth-destruction, not wealth-creation.
The solution before the SEC on proxy access isn't perfect, but it will probably do more to bust up crony capitalism and promote truer free market capitalism than any other piece of regulation they've introduced in the last 30 years. Let's hope it passes as is.
09/02/09 - 06:00 AM EDT
C , BAC , FNM , FRE , YHOO , MSFT
Eric Jackson
NEW YORK (TheStreet) -- After the meltdown of firms like Lehman Brothers, Citigroup(C Quote), Bank of America(BAC Quote), Fannie Mae(FNM Quote), Freddie Mac(FRE Quote) and General Motors, and the knock-on effect this has had on our entire economy, it's fair to ask the question: Where were the boards of directors when all of this was going on? How could they let such poor decisions happen under their watch?
The Securities and Exchange Commission agrees, and after more than 30 years of debating the possibility of doing so has proposed new amendments that will let shareholders nominate up to 25% of a public company's board (to be voted on by all shareholders).
The director nominees will go on the same company ballot that management's own nominees do. Shareholders will view the bios of all the nominees and pick the candidates they believe will do the best job in representing their interests.
I've voiced my support for the amendments in a letter to the SEC a few weeks ago. In fact, the SEC has received almost 500 letters commenting on the proposed amendments. Predictably, those opposing the proposed changes that will diminish their control are fighting hard against them. Their arguments against allowing shareholders to nominate directors, and my rebuttals follow:
No. 1. "The status quo system is working; don't punish all the good boards for a couple of bad boards."
These proxy access amendments won't require any additional work on the part of companies -- unless shareholders nominate alternate directors for election. In such a case, the incumbent board members will have to justify why they're better served to sit on the board as the shareholders' representatives. That's not such an onerous responsibility, in my opinion.
And remember that the U.K. and Australia have had such nominating mechanisms for shareholders for years and haven't seen a flood of proxy contests. The overwhelming majority of elections there are still uncontested. This rule doesn't punish all the good boards but will raise the quality of all the mediocre boards. A good board won't be impacted by these changes because they won't be a target for improvement.If the SEC mandated every director had to be men between the ages of 55 and 85, I would agree with this argument (many companies ironically choose that particular "one-size-fits-all" governance structure themselves). Yet, that's not what's going on here. This is a rule change allowing shareholders to freely select the best directors with the most relevant backgrounds to represent them.
This argument is like complaining that reporting your financial numbers on a quarterly basis is "one-size-fits-all," is too restrictive, and doesn't reflect the special uniqueness of some companies that should be free to choose to report their numbers once every three years.
No. 3. Special interests will get a larger voice on boards than they deserve."
Companies worry that their boards are going to be filled with members of the AFL-CIO, PETA and Amnesty International. The reality is that these groups might end up nominating candidates for election to the board but they'll likely not pass a vote of all shareholders (unless they can make a compelling case).
If Carl Icahn couldn't get elected to the Yahoo!(YHOO Quote) board last year after that board's botched handling of the Microsoft(MSFT Quote) negotiations (which is why he cut a deal with the company to take three seats), what hope would Amnesty International have?
No. 3. "Conflict will be introduced to boards."
Some sleepy boards out there would do well with a little conflict to wake them up and get them to actually focus on key strategic issues facing them. However, again as the international data show, these changes promote better monitoring and vigilance -- not more conflict.
No. 4. "No federal law should step on the toes of state law."
I'm not a lawyer, but I don't understand the problem with a federal law being introduced that supersedes state law when it is judged to bring more benefits than costs. Extending this argument, the SEC, a national regulator, should not exist because it trumps state rights.
No. 5. "Companies know how to pick 'professional' directors who will respect fiduciary duty better than shareholders."
Besides smacking of condescension, this argument makes me laugh because proponents of this view are saying incumbent boards will pick director nominees with a better sense of fiduciary duty than shareholders -- even though the shareholders are the people to whom the directors are fiduciaries.
There were dozens of anti-proxy access letters to the SEC that looked remarkably similar. Interestingly, they all came from very small private businesses that seemingly have no dog in this fight and follow a similar format.
The letters come from companies like Hair Shapers of Bakersfield, Calif., Herren's Heating & Cooling of Rainsville, Ala., and Slycers Sandwich Shop of Jacksonville, Fla. In Tammy Bonkowski's letter, she talks about how her hair salon, Rumor Has It, in Taylor, Miss. will be hurt by proxy access because the rule change will cause "more unemployed people."
A Wall Street Journal article last week linked these many similar-sounding letters as organized through the very large and powerful U.S. Chamber of Commerce. If true, it's a sneaky and deceptive way to try to influence final voting by the SEC commissioners on these rule amendments.
The bottom line is that, when public corporations were created, the expressed purpose of the board of directors was to represent the interests of shareholders while overseeing and monitoring management.
Somewhere along the way, management found a way to appoint its own overseers and then get them to run unopposed in a sham election.
Shareholders don't want to micromanage management; they just want the right to vote on the best qualified pool of representatives to serve on the board. The SEC's proposed amendments for proxy access provide that.
-- Written by Eric Jackson in Naples, Fla.
At the time of publication, Jackson's fund was long Microsoft.
Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.
Sphere: Related Content
I applaud that the SEC has taken quick steps to empower shareholders in the wake of the economic meltdown over the last 18 months. One issue still to be decided on is the issue of facilitating shareholders to nominate individuals to serve on a company's board. The issue will be voted on soon -- and hopefully won't be delayed (although the Business Roundtable has recently asked for one).
I recently submitted a letter to the SEC outlining why I think it's critical that the proposed amendments be passed. Here it is:
Ironfire Proxy Access Comment
