Gretchen of Arc

Gretchen Morgenson this week recaps the supposed results of her crusade against corporate managers, aka the proxy season. She thinks “shareholders have made clear they want greater involvement in director elections.” She’s exhorting them to even fiercer combat in her role as the Joan of Arc of corporate America.

Lke all crusaders, GM has to simplify things for the masses. For her the corporation is a democracy, directors the owners’ representatives whom shareholders ought to be able to fire. Who could argue with that reasoning? Well. . . somebody who understands a little about corporate governance.

To begin with, who are these “shareholders” GM wants to enlist in her crusade? Day-traders? Owners of small, diversified portfolios of shares? Mutual fund holders? None of these people would act like citizens of a republic in managing their investments if they had an ounce of sense, and no other interests at stake. They are rationally apathetic because the wonders of the capital markets and portfolio diversification let them be.

Even institutional shareholders, including pension and mutual funds, are usually well advised to follow the Wall Street Rule and sell poorly performing stocks unless, like many private equity funds today, or the takeover specialists of a former era, they have a comparative advantage in making control plays. Nevertheless, some big institutional shareholders like Calpers already take an active role in corporate governance.  For others there is a corporate governance industry (CGI) that advises institutional holders how to vote and companies how to behave. More on that below. The point for now is that these big shareholders hardly need GM’s advice.

So what’s the problem? According to GM, shareholders should have more power, and should have a “new appetite for activism.”  As solutions, GM alludes to the failed SEC shareholder nomination rule which was “swept under the carpet” (or, more accurately, finally killed as a stupid attempt to federalize corporate governance). She also refers to the LongView shareholder proposal to vote on CA directors – a blatant attempt to revive the SEC’s failed director voting inititiative -- and to a NYSE proposal to end broker voting of uninstructed shares.

The goal of all of these proposals is to empower activist shareholders and inflate the CGI. But as Paul Rose discusses in an article I've already noted and will be examining further tomorrow on Conglomerate’s Junior Scholars forum, the CGI is pushing rigid and sometimes questionable approaches to governance. Some activist shareholders may not only have a dubious path to better governance, but also objectives that most shareholders don’t share. For example, GM has written about LongView’s efforts at CA. As I’ve already discussed, LongView is a self-described “partner to the labor movement.” The proposed NYSE rule and an SEC ruling to give LongView access to management’s proxy statement would give these activist shareholders more power to threaten managers who don’t play their way. Is this really what the shareholders want?

It’s no surprise in light of these background facts that the governance revolution GM describes so far hasn’t gotten much further than requirements for majority votes for directors at some companies. As GM herself acknowledges today, these requirements may result in no more, and maybe even less, shareholder power.

All of the above makes me wonder about GM’s agenda. As I’ve made clear in prior posts, she’s not really interested in analyzing corporate governance, but rather in engaging in simplistic political rants. But why? She’s not a candidate for any board as far as I know, and I'm assuming has no personal interest in the outcome of any of these elections.

In prior posts I’ve applied to GM a general theory of journalist bias resulting from journalists’ own priors and their efforts to accommodate the presumed assumptions of their readers. But I’m increasingly finding this unsatisfying as an explanation of GM’s writings. She’s not simply writing about corporate governance, but involved in a campaign, a call to the barricades. Why?

One possible explanation is that what GM wants is not simply to entertain, or more readers, but power. In the land of the apathetic, the enthusiast is queen. Here the stakes are so low for individual average investors that GM’s tirades in her prominent NYT venue may sway some marginal votes, and may influence decisions to invest in Morgenson-compliant mutual funds.

This power that Morgenson would derive from her columns can be monetized. The NYT is not necessarily the last stop on the Morgenson Express. Even if it is, her opportunity costs in the investment or compliance industries might matter in journalism’s capitalist precincts. In any event, even without money, power can be inherently satisfying.

These, of course, are only speculations, based only on trying to understand how GM could reach conclusions that seem otherwise incomprehensible to me. For now it seems to me that Gretchen of Arc has concerns that are every bit as worldly as the managers she targets each week.

Comments

And why do we let public-sector and Taft-Hartley union funds monopolize the "shareholder activist" cognomen? If we're going to let people who don't really run proxy fights be called "activists," my preferred candidate would be ISS -- which currently officially takes the position that it's not an activist at all.

[Kate Litvak]

Larry, I dislike Morgenson as much as the next guy, but even a broken clock shows the correct time every now and then. Since when are you against shareholder power? Sure, it's not a cure from all ills, and sure, it can be abused, but what's the alternative? The power of people who do not bear financial consequences for their decisions? Principals shouldn’t be allowed to tell agents what to do because there are some stupid principals out there? Reminds me of people who say that all measures of performance are imperfect, so let's not link compensation to performance at all.

And, I am afraid, the SEC shareholder nomination rule was killed for reasons other than being "a stupid attempt to federalize corporate governance."

[Larry Ribstein]

Kate -- I'm not against shareholder power but against the unrealistic town hall democracy Morgenson seems to be proposing (I say "seems to be" because she doesn't really say). As I argue throughout my writings, the remedy for excessive managerial power is the market for control or a partnership-type structure that gives managers less control over the cash. But even if you like institutional shareholders, big holders like Calpers already have and use significant power, as I discuss in the post. Indeed, I note the existence of that power in my SOX book as one of many reasons we didn't need SOX. The problem is that Morgenson wants something more.

[Kate Litvak]

The question is why not have all three -- shareholder democracy, market for control, and unlocking of capital? Given today's state of the law, neither is sufficient by itself – and, frankly, neither would be sufficient even if the relevant laws were perfect. Market for control is rather weak today, given the DE jurisprudence on takeover defenses, and is an imperfect solution anyway because of high transaction costs. Shareholder ability to withdraw capital would require a fair amount of changes in law, and may not be feasible in many fields anyway. Shareholder democracy, although not perfect either, is a valuable addition.

[Larry Ribstein]

Kate -- These arguments are better addressed to Gretchen Morgenson than to me. Obviously shareholders should have some power. My criticism was based on the fact that Morgenson's position was "incomprehensible, not that there was no credible argument that could be made for some proposal to increase shareholder power. As I discuss in the post, arguments aren't her game - she's on a crusade. I would recommend your comments to her as examples of nuanced arguments she could be making instead. In fact, if she started making such arguments, I would suspect she had been kidnapped and substituted with you.