John Carney looks at Icahn's raid on AIG.
One of the persistent ideas among shareholder activists is mandating that the chairman of the board of directors--who in the USA is often also the company's CEO--be an independent, non-executive individual. I've written about this effort to split the CEO/Chairman before, arguing that the empirical evidence does not support it. Now there's a new study confirming that having the CEO serve as chairman of the board does not harm shareholder interests:
We use over 22,000 firm-year observations from 1995-2010 to investigate whether combining roles of CEO and board-chair causes poor performance. Our research design allows us to reconcile disagreement in the literature about whether CEO-chair duality impacts shareholder value. CEOs are awarded the additional title of board-chair following superior firm performance. A naïve analysis indicates a drop in firm performance following CEO promotion to chair. However, a research design that controls for the propensity to combine roles and performance mean-reversion reveals no post-appointment underperformance. Consistent with a learning explanation, investors react positively to combining both roles early in CEO’s tenure, but exhibit no reaction to combinations later in CEO’s tenure. Increases in post-combination compensation are unrelated to proxies for managerial power. Overall, there is no evidence that combining the CEO-chair positions hurts shareholder interests.
Jayaraman, Narayanan and Nanda, Vikram K. and Ryan, Harley E., Does Combining the CEO and Chair Roles Cause Firm Performance? (September 18, 2015). Georgia Tech Scheller College of Business Research Paper No. 2015-11. Available at SSRN: http://ssrn.com/abstract=2690281
An important new paper argues that:
The prerogative of boards of directors to nominate the members of the board for election by the shareholders is now challenged by institutional investors determined to acquire the right, under certain conditions, to nominate their own candidates. This challenge to a board prerogative is called proxy access by shareholders to the director nomination process.
As a result of amendments to the existing regulations in the United States, there has been a flood of proposals from shareholders to institute rules granting them access to the nominating process. In Canada, a form of access is already provided for by the Canadian Business Corporations Act (CBCA), but the conditions of this access are not perceived – by institutional investors, in particular – as sufficiently congenial because, among other factors, of the differential treatment for candidates put forward by shareholders.
Several plausible arguments may be marshalled in support of access to the nominating process by shareholders, such as the enhanced legitimacy of the directors sitting on the board. However, this proposal also raises a host of issues related to the logistics of its application and the potential adverse effects on governance and board dynamics. After an in depth analysis of the arguments for and against proxy access, IGOPP concludes that any process that would grant shareholders the right to put forward candidates for election to the board, whether such a process arises from new regulations or spontaneous proposals from shareholders, is unwise and likely to create serious dysfunctions in corporate governance.
We do recommend however that the nomination committee of the board implement a robust consultation process with the corporation’s significant shareholders and report in the annual Management Information Circular on the process and criteria adopted for nominating any new director.
Given the popularity of proxy access proposals among institutional shareholders, this policy position includes an appendix outlining the typical features, conditions and mechanics proposed for this shareholder access to the director nominating process. All these aspects of the proxy access initiative raise difficult questions to which we unfortunately find few satisfactory answers.
Allaire, Yvan and Dauphin, Francois, Who Should Pick Board Members? Proxy Access by Shareholders to the Director Nomination Process (October 30, 2015). Available at SSRN: http://ssrn.com/abstract=2685790
What can a shareholder do if she disagrees with a corporate expenditure, whether on a particular busi- ness strategy or in support of a political position? The short answer is very little. Shareholders do not typically have any right to control or direct the use of capital they have invested in a corporation, whether publicly or privately owned. ...
Expenditures by corporations on politics do not typically generate heightened scrutiny, and shareholders cannot use derivative lawsuits to override decisions about such expenditures by boards. These facts about corporate law hold true even if (in an unrealistic hypothetical) shareholders were uniform in their political views, and uniformly opposed an expenditure approved by the corporate board. These facts are unquestionably true in a more typical situation where shareholders disagree among themselves about politics. Nor do shareholders have indirect means to accomplish this goal—such as selling shares or using votes—as explained next.
They go on to elaborate the point for 39 pages.
I agree with their characterization of corporate power. After all, who developed the director primacy model? (Well, Mike Dooley did, but that's beside the point.) So I'm glad to see such a select group of my fellow corporate law academics at least endorsing director primacy as a positive account of corporate law.
But where does that leave us? After all, their analysis of the limited powers of shareholders applies with equal force to virtually everything the board of directors do. (See Bainbridge, Stephen M., The Case for Limited Shareholder Voting Rights. UCLA Law Review, Vol. 53, pp. 601-636, 2006; UCLA School of Law, Law-Econ Research Paper No. 06-07. Available at SSRN: http://ssrn.com/abstract=887789.)
In fact, at this point, the amici's argument stops. On its face, the brief is mostly descriptive with the normative argument limited to the claim that "If the Court decides to give union non-members additional rights to refuse to contribute to union speech, the Court should not act on the erroneous belief that this will accord union non-members the same rights enjoyed by individual investors." (5)
But words have consequences. Normative arguments will be made on the basis of the foundation laid by the brief.
As I see it, there are three normative moves that follow logically from the strong positive account of director primacy offered in the brief. (1) One can accept the normative claims of director primacy, as well as the positive ones, and thus endorse the power of directors to run the corporation's political contributions in the same way they run everything else. See Bainbridge, Stephen M., Director Primacy: The Means and Ends of Corporate Governance (February 2002). UCLA, School of Law Research Paper No. 02-06. Available at SSRN: http://ssrn.com/abstract=300860. Obviously, this is the correct solution to the problem, but I see some names on the list of signatories that would reject this option out of hand.
(2) One can go in the exact opposite direction and endorse an expansive theory of shareholder empowerment that gives shareholders broad powers to overturn board decisions. Some of them already have, of course. Compare, e.g., Bainbridge, Stephen M., Director Primacy and Shareholder Disempowerment. Harvard Law Review, Vol. 119, 2006; UCLA School of Law, Law-Econ Research Paper No. 05-25. Available at SSRN: http://ssrn.com/abstract=808584 with Bebchuk, Lucian A., The Case for Increasing Shareholder Power. Harvard Law Review, Vol. 118, No. 3, pp. 833-914, January 2005; Harvard Law and Economics Discussion Paper No. 500. Available at SSRN: http://ssrn.com/abstract=387940. IMHO, I'm right and they're wrong, although YMMV.
(3) One can generally accept director primacy as a normative matter but can try to argue that political spending is special and that therefore it needs special rules. But I don't buy it:
Having said that, I am nevertheless willing to assume most academics that believe political contributions are special also believe there is there is a neutral principles-based account that supports their view. But even if that's true, their arguments will be used by those who think political contributions are special because they believe that corporate political contributions favor one political party over the other, while those folks support the purportedly disfavored party.
In sum, this is not some ideologically neutral academic debate being discussed by corporate law technocrats. It has implications for shareholder activism, which itself is an increasingly politicized phenomenon. More important, the academic debate is inextricably intertwined with the left's effort to defund the right. Those of us who participate in this debate as academics cannot close our eyes to this basic fact.
As both a proponent of director primacy and a man of the right, I thus come down against treating politics as special. As an academic, I'd like to see my colleagues be equally forthright about their take on the politics of the issue.
Update: I suppose that there is a non-corporate governance move available, as well: One can argue that the law should treat union members and shareholders the same. But I'm not convinced that shareholders and union members are similarly situated. On this issue, however, I'm going to tag in folks like Brad Smith and Paul Atkins, who know more about the law governing unions than yours truly.
Update 2: One of the brief authors pointed out that "You might acknowledge that corporate law academics might agree on the descriptive points in the brief while disagreeing about whether those facts are good or bad from a normative perspective, and so to say we should be 'forthright' about those normative views would be impossible, yet the descriptive facts are important — and something SCOTUS has consistently gotten wrong."
Fair enough. But looking beyond this brief to the larger debate in the academic literature, I still think scholars on both sides of the issue need to acknowledge that their arguments have important real world consequences for the functioning of our political system and be transparent about whether they have skin in the political game.
Update 3: I've been going back and forth with the professor mention in the previous update. My last word on the subject was:
Vanguard, the largest fund family, is beginning to wield that power more aggressively. It has adopted a new approach to push for improvements to compensation practices, board construction, and other corporate issues, says Glenn Booraem, head of its corporate governance efforts.
Vanguard is now sifting through data, looking for companies that don't adhere to mainstream good-governance principles and then pressing the companies about its concerns.
My message to Glenn is: Stop it. Set aside the fact that shareholder activism is bad for corporate governance, the economy, and world peace. I buy index funds precisely because they are PASSIVE! I don't want index funds spending one dime more than necessary. I want my funds to keep costs as low as possible, because the evidence is clear that over time that's the best way to build wealth. So I don't want Vanguard paying multiple analysts 6-figure salaries to look for activism opportunities. If we must have shareholder activism, I want Vanguard to free ride on the efforts of others.
And if this nonsense keeps up, I will vote with my feet.
Yvan Allaire and François Dauphin return to a topic on which they have been active and important commentators and analysts; namely, hedge fund activism. Specifically, they report on a new study they conducted:
We ... explored, among other things, the consequences of activism over time when compared to a random sample of firms with similar characteristics at the time of intervention.
Focusing on activist events of the years 2010 and 2011, we obtained a sample of 290 campaigns initiated by 165 activist hedge funds which targeted 259 distinct firms. To map out the actions and performance of these 259 targeted companies, we have set up a random sample of 259 companies selected to match the targeted companies at the intervention year in terms of industry classification and market value.
This research does not provide any evidence of the superior strategic sagacity of hedge fund managers but does point to their keen understanding of what moves stock prices in the short term. Indeed, in none of the 259 cases studied here did hedge funds make proposals of a strategic nature to enhance the long-term performance of the firm.
That should concern society, governments, pension funds and other institutional investors with pretension of a long-term investment horizon.
indeed, it should.
Public Pension Fund Activism and Firm Value by Tracie Woidtke:
This paper examines the relationship between public pension funds engaged in shareholder activism—specifically, that involving corporate-governance rules or social/policy concerns—and firm value during 2001–13: consistent with the author’s previous research, the paper finds that public pension fund ownership is associated with lower firm value, as measured by Tobin’s Q and industry-adjusted Q.
The paper further explores this relationship across two time subsets, 2001–07 and 2008–13; it examines two data samples, the Fortune 250 and S&P 500; and looks separately at the major state pension funds engaged in such activism—principally the California Public Employees Retirement System (CalPERS), California State Teachers Retirement System (CalSTRS), New York State Common Retirement System (NYSCR), and Florida State Board of Administration (FSBA). Key findings include:
1. Ownership by public pension funds engaged in social-issue shareholder-proposal activism is negatively related to firm value. This relationship is significant for the 2008–13 period—when the two large funds focused on social-issue activism, CalSTRS and the NYSCR, were engaged in shareholder-proposal activism—in both the Fortune 250 and S&P 500 samples.
2. Ownership by NYSCR is negatively related to firm value during the period in which the fund was actively engaged in sponsoring shareholder proposals related to social issues. This relationship is significant for 2008–13, at the 1 percent level, for both the Fortune 250 and S&P 500 firm samples, as well as for the overall 2001–13 period for the broader S&P 500 sample. There is no statistically significant relationship between NYSCR ownership and firm value in the earlier 2001–07 period, when the fund was not as active in sponsoring shareholder proposals. Overall, S&P 500 firms targeted by NYSCR with social-issue shareholder proposals subsequently had a 21 percent lower Tobin’s Q and a 91 percent lower industry-adjusted Q than all other firm-years in the sample.
3. There is no significant relationship between public pension fund ownership and firm value for funds engaging in shareholder-proposal activism focused on corporate governance rules. For the full 2001–13 period, 2001–07 period, and 2008–13 period, there is no statistically significant relationship between firm value and ownership by public pension funds engaged in corporate-governance-related shareholder-proposal activism, in either the Fortune 250 or S&P 500 sample. Certain funds engaged in such activism—notably the FSBA and the Ohio pension funds—show significant positive relationships between their ownership and firm value for certain periods or samples.
These findings suggest that public pension funds’ shareholder activism influences companies but that such influence is not generally associated with positive valuation effects; when influence is associated with social-issue activism, valuation effects tend to be negative. In contrast, private pension fund ownership—driven by the Teachers Insurance and Annuity Association–College Retirement Equities Fund (TIAA–CREF), which engages in strategies designed to influence corporate behavior in its portfolio—is associated with higher firm value, at least in some sample study periods.
These findings are also consistent with the hypothesis that performance-based compensation for administrators of private pension funds generally results in a convergence of their interests with other shareholders’, whereas public pension fund administrators’ actions may be motivated more by political or social influences than by firm performance, leading to a conflict of interest. Policymakers overseeing state and municipal pension plans need to consider carefully the shareholder-activism strategies employed by their funds.
A Report on Corporate Governance and Shareholder Activism by James R. Copland and Margaret M. O’Keefe:
In the last two decades, shareholders have gained power relative to corporate boards. One way shareholders exert influence over corporations is by introducing proposals that appear on corporate proxy ballots. In 2015, shareholders were both more active and more successful in these efforts:
- The number of shareholder proposals is up. The average large company faced 1.34 shareholder proposals in 2015, up from 1.22 in 2014. This is the highest level of shareholder-proposal activity since 2010. The increase in 2015 has been driven largely by the New York City pension funds’ push for “proxy access,” which would give large, long-term shareholders the right to nominate their own candidates for director on corporate proxy ballots.
- The Securities and Exchange Commission has been more lenient in allowing shareholder proposals on the ballot. Another reason for the uptick in shareholder-proposal activity in 2015 is a more permissive stance adopted by the SEC in assessing shareholder proposals’ appropriateness for proxy ballots. In January 2015, the agency suspended the application of its “conflicting proposals” rule—and several companies this year faced shareholder proposals that conflicted with management proposals on the ballot. In 2015, the SEC issued 82 letters assuring companies that it would take no action if they excluded a shareholder proposal from their proxy ballot, down from 116 in 2014; the agency declined to issue no-action letters on 68 petitions in 2015, up from 50 in 2014.
- A small group of shareholders dominates the shareholder-proposal process. As in 2014, one-third of all shareholder proposals in 2015 were sponsored by just three individuals and their family members: John Chevedden, the father-son team of William and Kenneth Steiner, and the husband-wife team of James McRitchie and Myra Young. The NYC pension funds sponsored 11 percent of all proposals in 2015, but the overall percentage of shareholder proposals sponsored by labor-affiliated pension funds—28 percent—is below historical norms because private labor unions’ pension funds have been less active. Institutional investors without a labor affiliation or a social, religious, or policy orientation sponsored only one proposal.
- A plurality of shareholder proposals involve corporate-governance issues. Forty-three percent of 2015 shareholder proposals involved corporate-governance concerns—including 11 percent that sought proxy access. Forty-two percent involved social or policy issues, including 19 percent that focused on the environment. Although shareholder proposals focusing on corporate political spending or lobbying remained common—17 percent of all proposals—the overall number of such proposals fell to 51, down from 67 in 2014.
- The percentage of shareholder proposals receiving majority shareholder support is up. Eleven percent of shareholder proposals were supported by a majority of shareholders in 2015, up from just 4 percent in 2014. This uptick was due to substantial support for proposals seeking proxy access: 23 of 35 proxy-access proposals won majority shareholder backing. Aside from proxy-access proposals, only 4 percent of shareholder proposals—ten in total—received majority shareholder votes. Among the companies in the Fortune 250, not a single shareholder proposal involving social or policy concerns won majority shareholder support over board opposition—as has been the case for the past ten years.
In addition to capturing overall shareholder proposal trends, this report and a companion econometric analysis by University of Tennessee professor Tracie Woidtke assess shareholder-proposal activism by public-employee pension funds:
- Public-pension fund shareholder-proposal activism is associated with lower stock returns. Fortune 250 companies targeted by shareholder proposals by the five largest state and municipal pension funds from 2006 through 2014 saw their share price, on average, underperform the broader S&P 500 index by 0.9 percent in the year following the shareholder vote. Companies targeted by the New York State Common Retirement Fund, which in 2010 launched an aggressive shareholder-proposal effort focused on social issues, such as corporate political spending, saw their share price drop by 7.3 percent, relative to the broader market.
- Social-issue-focused shareholder-proposal activism helps explain a negative share-value effect associated with public-pension fund ownership. Controlling for various factors, companies in which public-pension funds invested from 2001 through 2013 were less valuable than those owned by private pension funds and other investors. This negative ownership effect was particularly pronounced for companies targeted by the New York State Common Retirement Fund with social-issue proposals and does not exist for the 2001–07 period, when that fund did not sponsor social-issue proposals.
- Shareholder votes supporting 2015 proxy-access proposals are associated with a negative stockprice reaction. When shareholders approved a Fortune 250 company’s proxy-access proposal in 2015, the company’s share price underperformed the S&P 500 index by 2.3 percent, on average, in the days following the annual meeting. Conversely, when shareholders voted down a company’s proxy-access proposal, the company’s share price outperformed the market index by an average of 0.5 percent.
In light of these findings, states and municipalities should consider how their public-employee pension funds should engage in future shareholder-proposal activism, if at all.
The Washington Legal Foundation has published a new article co-authored by SEC Commissioner Daniel Gallagher. It proposes "an idea last raised in the late 1990s:"
... devolve shareholder proposals back to the states, which traditionally and appropriately have been allotted authority over corporate governance matters. The state in which a company is incorporated would have the latitude to decide under what circumstances to permit shareholder proposals, and would adjudicate any questions about whether a proposal must be included. The SEC staff’s role could be limited to determining whether the proposal and any supporting or opposing statements authorized by state law contain any material misstatements or omissions.
Let's do it.
My backgrounder on Trinity Wall Street v. Wal-Mart -- the case on the ordinary business exception to the shareholder proposal rule -- is now available on line here.
My friend Loyola law professor Mike Guttentag recently sent me a reprint of his article On Requiring Public Companies to Disclose Political Spending, 2014 Colum. Bus. L. Rev. 593 (2014), which reminded me that I wanted to flag it for my readers. It is, put simply, the single best thing I've read on corporate political contribution disclosure.
Here's the abstract:
Mandatory disclosure is a central feature of securities regulation in the United States, yet there is little agreement about how to determine precisely what public companies should be required to disclose. This lack of consensus explains much of the disagreement about whether the Securities and Exchange Commission should require public companies to disclose political spending.
To resolve the political spending disclosure debate I therefore begin by considering the more general question of how to evaluate any proposed mandatory disclosure requirement. I show why the presumption should be against adding a new disclosure requirement, and then identify the kinds of evidence that should be sufficient to overcome this presumption. Applying this new analytic framework to the political spending disclosure debate—and basing this analysis in part on previously unpublished empirical findings—shows that public companies should not be required to disclose political spending.
Here's a link to the the law review page from which you can download the article.
Holman Jenkins captures it succinctly:
[William] Ackman uses stock options to control a company’s shares and agitate for change and is celebrated. A CEO is granted stock options in hopes that he or she will agitate for change and is vilified. What’s the difference? (Only one: The CEO has a contract that won’t allow him or her to pocket a short-term pop in the stock price and take off.)
Why do you notice the splinter in your brother’s eye, but do not perceive the wooden beam in your own eye? How can you say to your brother, ‘Let me remove that splinter from your eye,’ while the wooden beam is in your eye? You hypocrite, remove the wooden beam from your eye first; then you will see clearly to remove the splinter from your brother’s eye.
Keith Paul Bishop calls out CalPERS' hypocrisy:
A few weeks ago, CalPERS’ Director of Corporate Governance, Anne Simpson, sent a letter to the Securities and Exchange Commission in support of the SEC’s proposed pay for performance disclosure rule. Her letter notes CalPERS’ belief that “Compensation of executives in publicly listed companies should be driven predominantly by performance.” ...
As noted last week, CalPERS’ Chief Investment Officer is California’s highest paid civil servant (excluding the UC system). According to the Sacramento Bee’s state worker salary database, the CIO’s total pay for 2014 was $745,000, up over 36% from $547,000 for the year before. According to Pensions & Investments, CalPERS is reporting preliminary and very anemic investment returns of 2.4% for its fiscal year ended June 30. According to the same article, this is 5.1% below CalPERS’ assumed return.
In another post, Bishop takes a look at pay inequality at CalPERS and finds still more hypocrisy.
A paper coauthored by 2 SEC staffers argues that:
We use a unique setting to study the tradeoffs between universal regulatory mandates and private contracting in the field of corporate governance. Events surrounding the legal challenge of a 2010 proxy access rule allow us to benchmark the market’s expectation of the benefits of universally mandated proxy access even though this rule never came into effect. At the same time, a 2010 rule amendment facilitating shareholder proposals for proxy access opened a new channel for proxy access through "private ordering." We document that this private channel has been active, spawning about 160 proxy access proposals, and use the unexpected announcement of a major private ordering initiative to identify a 0.5 percent increase in shareholder value for the targeted firms. However, our findings also underscore that private ordering may lead to a second best outcome. We find that proponents do not selectively target those firms that were expected to benefit the most from universally mandated proxy access, and that tailoring of proposal terms is limited. Moreover, management is more likely to challenge proposals at firms that stand to benefit more. Overall, we find that private ordering creates value, but it may not efficiently deliver proxy access at the firms that need it most.
Bhandari, Tara and Iliev, Peter and Kalodimos, Jonathan, Public Versus Private Provision of Governance: The Case of Proxy Access (July 24, 2015). Available at SSRN: http://ssrn.com/abstract=2635695
But what the paper does NOT prove is that SEC mandated proxy access would be superior. The SEC's effort to mandate proxy access entailed a one size fits all approach with no opportunity for tailoring to specific firm needs (except that shareholders could vote for enhanced access) and no opt out option for firms that simply don't need proxy access for effective corporate governance.