Corporate Governance

Reform Efforts in Shareholder Paradise

By J. Robert Brown

Those fighting governance reform must confront the fact that many of the proposed changes are already in use overseas.  This is particularly true in Great Britain, a country sometimes derisively called a "shareholder's paradise."  Great Britain allows access and provides say on pay.

The country is reexamining governance matters in light of the recent financial meltdown.  Interesting ideas in that regard were floated by Paul Myners, the British Treasury minister.  He has suggested that shareholders have the authority to buy and sell their voting rights.  As he stated:

• "Some shareholders who never vote could sell their voting rights to others who do want to vote," he said in an interview last week. "That would introduce some market discipline into voting. It would have to be limited -- voting could not go beyond two votes per share, say. It is quite complicated, but it's got merit."

He likewise called for timed voting, with voting rights increased the longer shareholders held their shares. 

These rights already mostly exist in the US.  Empty voting, the practice of a shareholder having the right to vote without any of the economic risks, already takes place.  Moreover, most shareholders do not have fiduciary obligations and are, therefore, free to sell their votes.   As for timed voting, Delaware has upheld the practice, at least when in the articles of incorporation.

While there is nothing wrong with thinking broadly and spurring debate, both of these ideas, as the article notes, are antagonistic with good corporate governance.  A-B recapitalizations are a form of timed voting, leaving supervoting stock in the hands of long term investors.  Nonetheless, the practical effect is to allow certain shareholders to exercise control while owning a diminished share of the equity.  Moreover, as some critics of Myner's proposal noted, the approach has the wrong focus.

• Liz Murrall, senior adviser on corporate governance at the Investment Management Association, says differential voting in practice doesn't have the effect Lord Myners intends and in fact can be used as a tool by management to reward shareholders who support their strategy. "But long-term holders need to be enabled to exercise their proper responsibilities and there is certainly room for debate about the framework which will give them the incentives to do so most effectively," she said.

As for buying and selling votes, there are innumerable problems with the approach, not the least of which is the prospect of the company using the corporate treasury to buy enough votes to ensure the outcome of proposals it supports or opposes. 

Shareholder paticipation will increase when voting rights have meaning.  Right now with the Soviet style of elections at the board level, voting rights hardly matter.  Even with majority voting in the US, shareholders have marginal ability to influence board composition.  Boards can, as they have, refuse to accept the resignation of shareholders who do not receive the requisite majority. 

The better way to improve shareholder participation is to make voting rights more meaningful and allow for increased participation in the voting process. 

Full post as published by The Race to the Bottom on August 13, 2009 (boomark / email).