WSJ vs. FT on Shareholder Democracy

There is a widespread belief in the US that editorializing in the Wall Street Journal is limited to the editorial page. We’ve seen in the past that this just ain’t so (see posts of January 12 and January 16). And today we have a doozy.

We have a real news event, reported as the lead item now on the Financial Times website, which means it will almost certainly be a first page story, “US boardroom excesses under attack:”

Leading global investors on Thursday launched an unprecedented campaign to curb outsized executive pay, urging regulators and companies to give shareholders the right to vote on compensation.

The campaign brings together fund managers such as ABP, Europe’s biggest pension fund, with US pension funds including the New York City Employees’ Retirement System.

A dozen international shareholder groups, managing more than $1,500bn in assets, have written to US regulators, politicians and stock exchanges pressing for a UK-style non-binding shareholder vote on executive compensation packages.

The letter, sent on Thursday, coincided with a similar one sent by the Association of British Insurers, representing a fifth of UK investors, and a move by US pension funds and religious groups to file motions asking for a vote on pay at 44 companies, including ExxonMobil, GE and Citigroup.

I searched the Wall Street Journal site several ways, and found nothing on this item. Instead, we have this page 1 story, which smacks of being a PR placement and happens to be a direct attack on the efforts to strengthen shareholder rights, “How Borrowed Shares Swing Company Votes:”

Private investment firms have found a simple way to profit from the workings of public companies: Borrow their shares, and then swing the outcomes of their votes.

In some cases, the strategy has allowed speculators to gamble that a company’s stock will drop, and then vote for decisions that will ensure that it does — without their ever having to own any stock themselves. Some outside interests have used the strategy to hide their voting power within a company until the last moment. Often, individual shareholders don’t realize their own stocks, and their voting rights, have been borrowed from their brokerage accounts, until it’s too late.

Fueling the practice — dubbed “empty voting” in a study by two University of Texas professors — is a booming business in lending shares. That business has nearly doubled in the past five years, according to one report, and now earns $8 billion a year for big brokerages and banks plus an unknown amount for institutional investors. Voting rights are lent along with the shares, and increasingly, that is leading to unintended consequences.

Now the way the Journal has connected the dots is sneaky and misleading. They claim that short selling is “fuelling the practice” of empty voting, and by citing an academic study in the same paragraph, they try to buttress this linkage. Yet the vast majority of short selling is in hedge fund long-short and market neutral strategies, which by the very requirements of their investment style, do not engage in shareholder activism. The article goes on further to admit that the professors don’t know how much “empty selling” takes place. Indeed, they found only 22 examples WORLD WIDE from 2001 to 2006, and in 10 of those cases, the “empty shareholders” appeared merely to be hiding their stake rather than trying to swing a contest. Oh, and the two examples the Journal cited as illustrations of why this is bad both occurred outside the US, one involving Henderson Land Development, a Hong Kong company, the other British Land, a UK concern.

If you bother to read the actual paper (the Journal provides a link only to the abstract, and it takes a wee bit of fuss to get the study), the Journal has misrepresented it. The paper discusses the benefits as well as the costs of empty voting, and it cites the British Land example as a beneficial case!

In other words, if this is a problem, it isn’t much of one, particularly as far as US markets are concerned.

This article, posing a trumped-up problem, ignores a much bigger problem, namely, that institutional investors rarely vote against management, because their role as fiduciary conflicts with their business interests. If you are a Wellington or a Fidelity, you want to win the defined benefit and/or 401(k) business of major corporations. You most certainly are not going to alienate management by voting against the incumbents.

Now why do I believe that this story is an attempt to crowd out the real news of big institutions pressuring the SEC to have a greater say in CEO pay and director nomination? Because of a story that ran in the FT earlier in the week (I was tempted to comment on it at the time) that also went unnoticed in the US. Titled “US commissioner in hedge fund alert,” it parallels the Journal piece in some odd respects:

Short-termist activist hedge funds could gain undue influence on companies’ boards as a result of expected new rules allowing shareholders to vote on company directors, Paul Atkins, a commissioner at the Securities and Exchange Commission has warned.

In a speech to company directors and corporate governance experts on Monday night, Mr Atkins said giving investors greater say on the composition of boards could have the unintended consequence of increasing the power of hedge funds.

He said hedge funds’ ability to borrow and short-stock before crucial corporate meetings and use financial derivatives to own shares without having an economic interest in the company could lead to the appointment of “special interest directors”….

The issue of shareholder access to the company proxy is moving centre stage in US corporate governance.

The SEC is expected to revisit the issue in coming weeks, four years after an earlier attempt to allow such access failed. The subject is part of growing calls by investors for greater influence on corporate governance matters after the scandals of the past few years.

This week, Norway’s Norges Bank Investment Management, Hermes of the UK and Dutch duo ABP and PGGM, pressed the SEC on shareholder access to the proxy.

Opponents of such access, chiefly the Business Roundtable and US Chamber of Commerce, have long argued that opening up the proxy for voting purposes could allow companies to be “hijacked” by special interests – usually a reference to unions and environmental activists.

But Mr Atkins said the increasing role of hedge funds and other activist investors in pushing for change to underperforming companies, or influencing the outcome of takeovers, means any debate should now also include the role of such interests…

A 2005 BusinessWeek article discusses how Atkins, a Bush appointee, has fought (and often been the lone holdout against) regulation of hedge funds, large fines against miscreants, and former SEC Chairman William Donaldson’s plan to let shareholders nominate corporate directors. He reportedly plays dirty, complaining about the Commission to the White House and encouraging attacks by outsiders like the Chamber of Commerce (hhm, didn’t we see that name a couple of paragraphs ago?)

So here we have the idea of stronger shareholder democracy might be nixed out of theoretical concerns that “special interest directors” might “hijack” companies. Gee, legitimate shareholders, like Ted Turner in the old Time Warner (TWX) days, who WERE directors by virtue of their large stakes, were only able to make noise.

Even before a special interest shareholder has ever existed, they are assumed to be detrimental. And Commissioner Atkins just happens to be using a very similar sort of bugaboo, barbarians at the gate gaining illegitimate access to the corporate inner sanctum, as the Business Roundtable and Chamber of Commerce have for years, but in their 1.0 version, the bad guys were unions and environmentalists. In the 2.0 release, it’s hedge funds. And both the Journal and Atkins have as the only evidence a single study with very few data points and even fewer negative outcomes from academics at a second rate institution. This is the best reason they can give us for not interjecting some checks on CEO pay?