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Washington Examiner


Political Activism Meets Corporate Governance

September 21, 2011

By James R. Copland

Shareholder activism can be beneficial. The threat of corporate takeovers encourages efficient management, and common-law fiduciary duties and voting rights augment the ability to sell one’s shares in protecting holders of equity capital who -- unlike bondholders, employees, suppliers and customers -- cannot protect their interests through written contract.

Unfortunately, much of the shareholder activism being pressed against corporations today is concerned not with protecting shareholders’ general interests, but rather advancing the specific interests of a small cohort of shareholders who have concerns that go beyond maximizing their investments.

Such investors are taking advantage of a federal Securities and Exchange Commission rule that empowers any shareholder who has held $2,000 of stock for at least one year to introduce shareholder proposals on corporate proxy statements for a vote of all stockholders at a company’s annual meeting.

Though the SEC’s rule is broad, the class of shareholders exploiting it is narrow.

According to data drawn from the Manhattan Institute’s database, comprising all shareholder proposals submitted to the Fortune 150 over the last four years, only 2 percent of all shareholder proposals were sponsored by institutional investors without a “social investing” mission or a connection to a religious or public-policy organization or labor union.

Although individual investors sponsored 40 percent of proposals, two-thirds of those emanated from just four people and their relatives.

Moreover, almost 40 percent of all shareholder proposals submitted since 2008 involved social or political questions such as human rights, animal rights, environmental concerns or “health care principles.”

Even those proposals that did relate to questions of corporate governance or executive pay often revealed potential motives beyond improving share performance.

Consider shareholder proposals sponsored by labor-affiliated investors, principally union pension funds, which have constituted 30 percent of all proposals faced by the largest corporations.

Though most union-backed proposals have involved corporate governance and executive pay, they have tended to center around questions highly sensitive to upper management, such as separating the chairman and CEO position -- thus raising the question of whether these funds are exploiting the corporate-governance process to extract labor concessions from management.

Such concerns are heightened by the fact that union funds have been disproportionately filing proposals at companies in industries that are currently less-unionized but the targets of ongoing, public labor-organizing campaigns.

In a March report, the Office of the Inspector General of the Department of Labor refused to rule out the possibility that labor-backed investing funds were introducing proposals and voting their shares for reasons other shareholder return, as they are required to do under federal law.

To be sure, proposals that advance social or political goals almost inevitably fail: none has received majority support from shareholders in the data set.

Rather than changing corporate behavior directly, the sponsors of such proposals are more interested in gaining an audience with management and a public platform for their ideas.

But over the past decade, many other types of proposals have begun to pass, peaking at 12 percent in 2009. These proposals, while ostensibly neutral, often empower shareholder activists by changing shareholder voting rules, modifying board structure or otherwise altering the balance of power between shareholders and directors.

Regardless of one’s views about how best to regulate corporations, such trends should be troubling. Labor rights, the health care system and climate change are all appropriate topics for political debate, but mutual funds investing our equity capital are ill-suited to resolving them.

Ironically, while done in the name of “shareholder democracy,” much of today’s shareholder activism has been an end-run around legislative decision-making, as corporate activists follow a path already well-trod by avaricious plaintiffs’ lawyers and abusive prosecutors alike.

To regulation by litigation and regulation through prosecution, we now can add regulation through shareholder activism.

Original Source:



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