Institutional Investor Micromanagement

Institutional investors routinely claim that they don't want to micromanage corporations and, accordingly, that "reforms" intended to "empower" shareholders will not be used towards that end.

At least insofar as executive compensation and union pension funds are concerned, micromanagement is the order of the day.

Jeremy Goldstein explains:

The SEC staff has denied a no-action request by Regions Financial to exclude a shareholder proposal requesting that Regions impose numerous restrictions on executive compensation in light of the company’s participation in the TARP Capital Purchase Program (CPP). Several unions have reportedly submitted the proposal (or a variation thereof) at nearly two dozen financial institutions. Its restrictions, if adopted, would severely hamstring a company in designing compensation to attract, retain and incentive senior management. The union proposal would micromanage executive compensation with a laundry list of rigid, inflexible restrictions, including an annual cap on incentive compensation, a requirement of performance vesting for most long-term equity compensation, a requirement that stock option strike prices be peer-indexed, a bar against executives selling more than 25% of their equity awards while they remain employed, a prohibition on accelerated (e.g., non-cause firing) vesting for all executive equity awards, a limit on severance payments to no more than annual salary and a freeze on the accrual of retirement benefits under SERPs.

Regions argued that the proposal is actually multiple proposals in violation of Rule 14a-8 and is vague and indefinite (among other reasons, for failing to say whether the restrictions would be permanent or limited to the period of TARP participation). Regions also argued that it had substantially implemented the proposal by agreeing to limit executive compensation in its CPP investment agreement with the U.S. Treasury. Last December, the SEC staff granted no-action relief to SunTrust on a substantially identical shareholder proposal. In denying Regions’ request for no-action relief, the staff provided no explanation for its about-face.

This is precisely the sort of thing about which I warned in my fight with shareholder empowerment champion Lucian Bebchuk.

In this case, however, it's not just micromanagement. It's also class warfare.

My guess is that shareholders will vote down these proposals. After all, it's hard enough for struggling financial institutions to attract top management in light of the TARP restrictions. Adding even more restrictive governance bylaws would simply compound the problem.

The question remains, however, why we want to force companies to jump through these sort of hoops.