Wonderful shareholder empowerment news

In a decision that definitively will change the face of U.S. capitalism and investing, the Securities and Exchange Commission (SEC) today announced that in August at some point shareholders will receive the right to directly nominate candidates for a company’s board of directors.  Only shareholders who hold more than 3% of the outstanding shares will win the right to nominate directors.

While this may sound like something shareholders can already do, it has proven to be nearly impossible.  While this may sound like a benign shift, it will ultimately have a massive affect on businesses and how they are run.

Currently if a shareholder wants to nominate their own director they have to pay for this proxy campaign out of their own pockets.  Clearly for a business that has millions of shareholders, like General Electric, this is prohibitively expensive.  Furthermore, even after incurring this expense there is no guarantee that your candidate will win in the election.  Additionally, most corporations have staggered board terms.  This means that only a small number of board seats are up for election in any given year.  So to win a majority on the board of directors takes many years and many millions of dollars.  And why is this important?

It is an open secret that corporations are largely dominated by their upper management teams, especially the chief executive officer (CEO).  Typically the CEO is also the chairperson of the board of directors.  This gives the CEO the ability to dictate the agenda of the board.  So what?  Well the board of directors is supposed to serve the shareholders.  You remember them, yes?  Shareholders are actually the owners of the business, not just sniveling providers of secondary market capital.  Not just victims of corporate indifference.  The problem is that boards are usually chock full of directors nominated by, supported by and friends with the upper management teams of most corporations.  Folks this is why executives are so massively overpaid.  This is why most executive compensation plans only reward success, but don’t punish failure.  This is a huge reason why the recession occurred.  That is, there was very, very, very lax corporate governance in place.

Predictably the two Republican (of five total) SEC commissioners are expected to vote against the SEC “proxy access” rule.  Expect Republicans, in general, to complain, along with businesses, that the new rule will allow “needless,” “unwarranted” and “dangerous” meddling in the day-to-day operation of U.S. businesses.  Can I just tell you: THIS IS RIDICULOUS!  First of all, to become a 3% shareholder in a business requires billions of dollars in many instances.  Few, except for truly well-monied and interested parties, can afford to achieve this threshold.  Second, the best way for businesses to avoid scrutiny from large investors is to run the business well enough so that shareholders don’t feel the need to become activists.  Duh!

Way to go SEC!

Jason