Why are proponents of shareholder activism so thin skinned?

JW Verret had the temerity to post about ways in which companies could defend against proxy contests, which annoyed self-appointed shareholder activist and spokesperson James McRitchie, "who writes at Corpgov.net and works with the large institutional investors like the AFL-CIO and the California State Pension Fund that lobbied for proxy access":

I wonder if Professor Verret also offers advice on how to circumvent tax codes, the Occupational Safety and Health Act, or the Americans With Disabilities Act. Harvard must be pleased to have such a distinguished scholar. Hopefully, most companies will seek to work with their shareowners but I suppose there will always be companies like Apache that may find Verret’s strategies appealing. No, I’m not adding these posts to our Links page. Hopefully, they will fall under the category of fantasy.

I've spent the better part of my career crossing swords with these folks and I find them a remarkably thin skinned bunch. Call them "self-appointed" or "gad flies" or "water carriers for left liberal organizations like unions" and they get all offended.

Anyway, let's dissect McRitchie's effort to cloak proxy access in immunity from criticism. Notice the rhetorical sleight of hand he uses. First he tees up three laws he thinks everybody loves: taxes, OSHA, and the ADA. (It says a lot about the mindset of McRitchie and his ilk that he thinks these are such wonderful laws, BTW. Considering how much those laws cost shareholders every year, there's a real inconsistency between his status as self-appointed shareholder advocate and his invocation of them as golden calfs of the law.) Then he implies that any attempt to mitigate the impact of those laws is evil. Then he sneaks proxy access into the protected circle of laws that no right thinking person would try to avoid.

But what's wrong with giving people advise about how to circumvent the tax code? After all, as famed Judge Learned Hand opined, "any one may so arrange his affairs that his taxes shall be as low as possible." If they get a lawyer's help in doing so, who cares?

As for giving people advice on circumventing the Americans with Disabilities Act, why not? David Frum recently observed that the ADA was "a generous idea turned into a litigation morass." His comment was prompted by Walter Olson's devastating 20th birthday salute to the Act., in which he observed that:

One reason for the law’s immunity from criticism is that it is defended as a matter of identity politics: if you’re against it, then you must be against the people it protects. So it is treated as rude, not merely provocative, to bring up the failure of the original ADA premise that the new law would “pay for itself” by increasing the labor force participation of the disabled (the rate declined instead). Or to question the law’s “all for one, one for all” extension of the disability label to cover alcoholics, the mentally ill, and the mentally retarded, groups whose problems have historically been seen as quite different from those of the blind, deaf or paraplegic. Or to mention the money-driven ADA “filing mills” in California, Florida and other states under which complainants roam the land filing hundreds of similar complaints against local businesses which their lawyers then convert into assembly-line cash settlements.

McRitchie none too subtly tried to cloak proxy access in the same immunity from criticism that he think the ADA deserves. Clever, but unpersuasive. Proxy access is a bad idea and will make a lousy law, as Verret opines:

Enabling large institutional investors like CalPers and the AFL-CIO will result in politicization of the shareholder voting process. Groups like Corpgov.net and Nell Minow’s Corporate Library hide behind fluffy notions like the “triple bottom line” to justify pushing companies toward vague objectives like sustainability or stakeholder accountability in order to support their ideas that companies should make decisions about health care coverage or wages without a view to profitability. Those groups have never been able to effectively respond to Bainbridge’s argument that the profit motive is the only viable accountability mechanism for corporate boards.

So kudos to Verret. Any day one riles up the self-appointed shareholder spokesperson crowd is a good day.

Comments

[Corpgovnet]

Thin skinned? if I am, maybe it is because I have grown old waiting for proxy access and my skin isn't as elastic as it was in my youth. One of the goals underlying enactment of the Securities and Exchange Act of 1934 was to reduce management's domination of corporate boards.

Shareowners are empowered under state law to elect directors to represent their interests but we have been systematically deprived of the opportunity to play a meaningful role in the selection of candidates or to choose among competitive candidates.

Proxy access will stimulate nominating committees to seek greater diversity of skills and opinions, will lead to decision-making that is likely to be of greater value to shareowners and will enhance share value.

The SEC proposed proxy access in 1942. Almost 70 years later we may finally get a watered down version of that original proposal. Those who oppose proxy access often argue as if the proxy statement is management's, rather than the corporation's, with all shareowners sharing its cost.

In August of 1977, the Business Roundtable recommended “amendments to Rule 14a-8 that would permit shareholders to propose amendments to corporate bylaws, which would provide for shareholder nominations of candidates for election to boards of directors.” Their memo noted such amendments “would do no more than allow the establishment of machinery to enable shareholders to exercise rights acknowledged to exist under state law.” Now the BRT and their apologists seems to think proxy access will be the end of the world.

Looking back at SEC decisions, as the court did in AFSCME v AIG, you will see that what is now called "private ordering" was allowed. Unicare Services in 1980, Union Oil in 1981 and 1983 as Unocal, Newberry Corporation in 1986, Chittenden Corp. in 1987. The SECs reversal (without a rulemaking) came only after it appeared that shareowner resolutions would finally start winning.

Why should shareowners have to wait until the value of their company has plunged and hold an expensive proxy contest to throw out the whole board when a much less costly partial change through proxy access may be enough. The current arrangement encourages litigation or expensive proxy fights as the only meaningful director reform mechanisms.

In Shareholder Activism in the Obama Era (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1437791), Bainbridge argues that shareowners should wait until "performance is sufficiently degraded" to "make a takeover fight worth waging." His model is basically pre-democracy. Wouldn't it be much more efficient to elect a better board than to wage a takeover fight? Let me roll out another "golden calf." Democracy is a better alternative to war.

Bainbridge relies on a study done in 1998 by Bernard Black that surveyed previous studies to demonstrate that shareowner activism doesn't add value. Of course, Black was arguing shareowners invested too little effort to make much of a difference. That has been changing, although more effort would yield more results. Bainbridge himself argues that SEC rules "have long impeded communication and collective action" by shareowners. That's a reason for speeding up corporate governance reforms, not slowing them down.

Bainbridge is afraid that unions and pension funds will "politicize" corporate elections but fails to recognize the Business Roundtable and entrenched boards represent the real powerful and narrow "special interests" that too frequently lead to abuse. They can often accomplish their "special agendas" without convincing a majority of shareowners. Shareowner activist face much higher barriers and can accomplish little without consensus building among very dispersed investors.

Turning board elections into real contests won't adversely influence the decision-making of directors. Knowing they can actually get turned out of office will simply make them more accountable to shareowners. It will remind them that directors work at the pleasure of shareowners and CEOs work at the pleasure of directors.

[Passing By]

"Considering how much those laws [taxes, OSHA, and the ADA] cost shareholders every year, there's a real inconsistency between his [McRitchie's] status as self-appointed shareholder advocate and his invocation of them as golden calfs of the law."

Whatever Mr. McRitchie's other shortcomings, I see no inconsistency here.

Those laws cost companies' money but also provide them benefits. Do you really think American business would somehow be better off without taxes, OSHA or the ADA?

Every developed country has them, or similar. Without them, there are no government services. And instead, you don't get a libertarian paradise ... you get a Third World pesthole run by gangsters.

There are plenty of such pestholes available but very few American businesses or entrepreneurs shift their operations there, They realize that a developed society underpinned by a sizable governemnt provides a much more-profitable business environment.