Frankly, now that financial markets reform has moved from the Congressional shadowboxing stage to the arm-wrestling in smoke-filled room sort-out-the-details-that-matter stage, the retreat from public scrutiny has, of course, served as a cover for further watering down of measures that were not very strong to begin with.
Yesterday we noted that major companies were outraged at the notion that major institutional shareholders might be able to propose board candidates. The argument in effect was that the odds were high that shareholders, a group that clearly can’t be trusted to make sound financial decisions, would immediately vote in a hedge fund or union stooge who would destroy the enterprise. The SEC was nevertheless expected to pass the measure on a party line vote.
Well, we learn today that they did, with a wee wrinkle. They chose the weakest variant of the measure being contemplated. As the Financial Times noted on Tuesday:
The proposal allowing investors to put their own nominees for board seats alongside the company’s nominees is expected to be approved by the Securities and Exchange Commission…
The new power is expected to be restricted to investors with a 3 per cent or greater stake in the company who have held the shares for at least two or three years, people close to the situation said. The SEC commissioners have the power to exempt smaller companies from the rule, should they wish to do so.
Despite this setting a new precedent, the 3% hurdle is a daunting level, since as I read the SEC’s announcement, this is the level required for a single shareholder. And the SEC further decided upon the longer holding period of three years.
Pray tell, how many companies even have shareholders that meet these criteria? The Business Roundtable must be quietly chuckling over this win.
Update 5:00 PM: Jim Ledbetter provides an answer to the question above. Superficially, the number of 3% shareholders looks larger than I thought, but there is also reason to believe the overall stats mean less than one might imagine. From his post:
As part of its deliberation over this rule, the SEC produced a study that combed through the filings of 6,416 companies in late 2008. According to the study, 33 percent of companies have one or more shareholders who meet the 3 percent, three-year thresholds; 10 percent have two or more shareholders; 4 percent have three or more; 1 percent have four or more; and no one has five or more. That alone implies that the rule would cover more than 2,000 companies.
Yves here. That means based on a narrow reading of the rule, less than 1/3 of the companies fall into the category of having a shareholder that can nominate a board member. And perhaps most important, the rule allows a 3% group to nominate only one board member per proxy, not a slate, so the impact is limited (this was a key point I neglected to mention).
The open question is how many of these 3% are independent. You have quite a few public companies where the founders/early owners still hold large stakes (think Microsoft and Oracle as positive examples, HealthSouth as a big negative). You also have cases where individuals and families wind up with large stakes by having sold a business to a large company and getting shares rather than cash as consideration (shares are not taxed until sold). In general, individuals and family offices are far more likely to be long term shareholders; institutional investors generally trade more often, since they are more short term return driven, while individuals often care more about after-tax returns.
A good bit of news, however, Ledbetter dug into the SEC rules (I was not able to find it quickly on the site last night, my bad, and the SEC’s several page summary was ambiguous on this point) and his reading that shareholders can cooperate to get to 3% (but then why the study on individual shareholders?)
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Remember the TIME cover of Elizabeth Warren, Sheila Bair, and …..Mary Schapiro, all looking stern and tough (I guess toward wayward capitalists)?
Re: Elizabeth Warren…real deal.
Re: Sheila Bair…well, maybe.
Re: Mary Schapiro….ROTFLMAO
I feel like you’re missing the fact that the last thing we should want is that institutional money be given more control of corporate Boards. Their incentives don’t align well with corporate objectives.
Corporations are formed (investment made) with the objective (of entrepreneurs) to develop a market opportunity. Institutional investment is made to extract value from that earlier investment and it’s easier to dis-invest than to continue to create longer-term value. My feeling is that this financial crises began with the tax subsidies which created the mutual fund industry and is the root of the exaggerated parasitic behavior we both deplore. Too many institutions hold 3% of companies.
I disagree strongly with you here, Yves. This is a good rule. We can’t have, for example, directors handpicked by a political cause group that has bought 100 shares that it has held for 2 weeks. There need to be checks and balances. Long-term, big shareholders are precisely the ones who should have the biggest say in the process of choosing directors. And hey, maybe a rule like this will get investors to hold shares longer. That would be a great thing, no? Also, there is no shortage of 3% holders, as proxy statements reveal.
Actually, 3% is not required of a single shareholder. The rule says investors may aggregate their holdings. In other words, if a money manager owns 2% of a company’s stock, he can team up with another who owns 1% and together they can nominate people to the board.
I and many others have a big bundle in my retirement fund, basically Vanguard 500. I and many others may wish Vanguard would vote on our behalf to limit executive compensation. If I understand you correctly, Yves, you are saying they could not legally do it unless they owned over 3% of the stock.
I also saw the part where it says shareholders can aggregate their shares to meet the 3% threshold. Much of the rest of the wording talks about “a shareholder,” which is a bit confusing.
What I wonder, somewhat idly, is what happens if 3% of shareholders propose candidate A, another 3% propose candidate B, etc. until there are enough shareholder candidates to entirely replace the Board? Do all those candidates get writeups in the proxy materials?
Would be nice if the Boards of Directors had to propose at least twice as many candidates as positions open in EVERY election, so there’d be an actual choice at every election instead of only when one or more shareholders is really on the warpath.
Too many boards are the amen corner of the CEO and her/his gang. Any mechanism to make the board less of a rubber stamp and more of a leading group will improve the running of the company. 3% is too high; every substantial stock holder (“substantial” should be a function of the company size and complexity) be able to nominate individuals to the board. The current situation is provably dysfunctional.