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http://atlanta.bizjournals.com/atlanta/stories/2004/03/22/editorial4.html
Shareholders as 'hijackers'?
John F. Ray
As the old saying goes, when a fellow says it isn't the money but the principle of the thing, it's really the money.
In that spirit, the managements of many major corporations would like us to believe that the end of capitalism as we know it is upon us. The Securities and Exchange Commission has proposed several changes to the proxy voting system designed to give shareholders more voice in the nomination and election of their representatives on the board of directors.
Under the SEC's proposed rules, investors could get a nominee on the proxy ballot under two instances. The first would allow any group of shareholders holding at least 1 percent of a company's shares to request that a director candidate be added to the ballot the following year. This group of shareholders would have to have owned shares in the company for at least a year. If this proposal received at least a 50 percent vote of shareholders, this director nominee would be on the proxy ballot at the shareholder's meeting the following year.
Under the second scenario, if 35 percent of a company's shareholders withheld their votes for a slate of directors or an individual director, investors would be allowed direct nominations for the following shareholders meeting. In either case, nominees would be required to meet director qualifications tests imposed by major securities exchanges like the New York Stock Exchange.
Behind the scenes, many current corporate CEOs are furiously trying to stop or water down these rule changes. Their opposition takes its public face in the form of groups like the Business Roundtable and the U.S. Chamber of Commerce. In an open letter to the SEC published earlier this month, 40 former Business Roundtable CEOs wrote that these proposed rule changes would "enable large institutional investors with narrow short-term interests to infiltrate corporate boards, ultimately undermining financial performance -- and the nation's economy." The letter goes on to say that this proposal would "erode director responsibility," allow labor union funds to "manipulate the corporation," and "erode state law."
Tom Donohue, head of the U.S. Chamber of Commerce, wrote in a recent Investor's Business Daily editorial that this rule change "has the potential to invest enormous power in a small number of special-interest investors at the expense of all others," and that "unions and public employee pension funds are the 'investors' best positioned to hijack the nominating process."
The mentality behind these statements is revealing. "Infiltrate" the board room? "Hijack" the process? Such talk makes shareholders of any description and potential directors elected under these proposed rules sound like KGB agents. To read the invective, one would might be convinced that hidden somewhere in the footnotes of this proposal, a prohibition on Mom's apple pie lurks.
Shareholders not only deserve but require the checks and balances inherent in just the threat of legitimate shareholder retaliation. The threat is minimal today. Shareholders are forced to undertake self-funded proxy contests, opposed by incumbent management willing to spend whatever corporate assets necessary to maintain their positions.
Getting even the most mediocre management removed requires a determined commitment and a deep pocketbook, or an event described by Oliver Herford when he remarked that "there's always room at the top -- after the investigation."
Well-managed companies haven't a thing to fear from this proposal. As recently reported in Atlanta Business Chronicle, the chairman and CEO of Columbus-based Synovus Financial Corp., Jimmy Yancey and Jim Blanchard, agreed to forgo their bonuses for 2003 because the company did not meet its internal targets. These individuals took this action in spite of the fact that Synovus reported record earnings for 2003.
After such a revelatory act of character on the part of Yancey and Blanchard, does anyone seriously believe that one "dissident" director nominee could actually receive 50 percent of the shareholder vote at Synovus? Not a chance.
Contrast this behavior with Disney CEO Michael Eisner. Disney's performance over several years has been anemic by virtually any standard, and shareholder dissatisfaction with this performance recently culminated in a 43 percent "no confidence" vote for Eisner at the company's recent annual meeting. Later that evening, with amazing temerity, Eisner told ABC's "Nightline" that "our shareholders are happy with our performance."
If the SEC's proposal were in effect currently, Disney shareholders would now have the ability to put forth their own nominees. Remember, such an event would only occur after shareholder dissatisfaction was so rampant that almost half the company's shareholders withheld their vote for the CEO of the company. Moreover, an actual vote on a shareholder-proposed director at Disney would not occur until next year.
The SEC's proposal, a modest one made after careful thought, deserves implementation. Only those companies that deserve to be disrupted will be.
Ray is president of Heritage Capital Advisors LLC, an investment firm based in Atlanta and Memphis.
© 2004 American City Business Journals Inc.
Shareholders as 'hijackers'?
John F. Ray
As the old saying goes, when a fellow says it isn't the money but the principle of the thing, it's really the money.
In that spirit, the managements of many major corporations would like us to believe that the end of capitalism as we know it is upon us. The Securities and Exchange Commission has proposed several changes to the proxy voting system designed to give shareholders more voice in the nomination and election of their representatives on the board of directors.
Under the SEC's proposed rules, investors could get a nominee on the proxy ballot under two instances. The first would allow any group of shareholders holding at least 1 percent of a company's shares to request that a director candidate be added to the ballot the following year. This group of shareholders would have to have owned shares in the company for at least a year. If this proposal received at least a 50 percent vote of shareholders, this director nominee would be on the proxy ballot at the shareholder's meeting the following year.
Under the second scenario, if 35 percent of a company's shareholders withheld their votes for a slate of directors or an individual director, investors would be allowed direct nominations for the following shareholders meeting. In either case, nominees would be required to meet director qualifications tests imposed by major securities exchanges like the New York Stock Exchange.
Behind the scenes, many current corporate CEOs are furiously trying to stop or water down these rule changes. Their opposition takes its public face in the form of groups like the Business Roundtable and the U.S. Chamber of Commerce. In an open letter to the SEC published earlier this month, 40 former Business Roundtable CEOs wrote that these proposed rule changes would "enable large institutional investors with narrow short-term interests to infiltrate corporate boards, ultimately undermining financial performance -- and the nation's economy." The letter goes on to say that this proposal would "erode director responsibility," allow labor union funds to "manipulate the corporation," and "erode state law."
Tom Donohue, head of the U.S. Chamber of Commerce, wrote in a recent Investor's Business Daily editorial that this rule change "has the potential to invest enormous power in a small number of special-interest investors at the expense of all others," and that "unions and public employee pension funds are the 'investors' best positioned to hijack the nominating process."
The mentality behind these statements is revealing. "Infiltrate" the board room? "Hijack" the process? Such talk makes shareholders of any description and potential directors elected under these proposed rules sound like KGB agents. To read the invective, one would might be convinced that hidden somewhere in the footnotes of this proposal, a prohibition on Mom's apple pie lurks.
Shareholders not only deserve but require the checks and balances inherent in just the threat of legitimate shareholder retaliation. The threat is minimal today. Shareholders are forced to undertake self-funded proxy contests, opposed by incumbent management willing to spend whatever corporate assets necessary to maintain their positions.
Getting even the most mediocre management removed requires a determined commitment and a deep pocketbook, or an event described by Oliver Herford when he remarked that "there's always room at the top -- after the investigation."
Well-managed companies haven't a thing to fear from this proposal. As recently reported in Atlanta Business Chronicle, the chairman and CEO of Columbus-based Synovus Financial Corp., Jimmy Yancey and Jim Blanchard, agreed to forgo their bonuses for 2003 because the company did not meet its internal targets. These individuals took this action in spite of the fact that Synovus reported record earnings for 2003.
After such a revelatory act of character on the part of Yancey and Blanchard, does anyone seriously believe that one "dissident" director nominee could actually receive 50 percent of the shareholder vote at Synovus? Not a chance.
Contrast this behavior with Disney CEO Michael Eisner. Disney's performance over several years has been anemic by virtually any standard, and shareholder dissatisfaction with this performance recently culminated in a 43 percent "no confidence" vote for Eisner at the company's recent annual meeting. Later that evening, with amazing temerity, Eisner told ABC's "Nightline" that "our shareholders are happy with our performance."
If the SEC's proposal were in effect currently, Disney shareholders would now have the ability to put forth their own nominees. Remember, such an event would only occur after shareholder dissatisfaction was so rampant that almost half the company's shareholders withheld their vote for the CEO of the company. Moreover, an actual vote on a shareholder-proposed director at Disney would not occur until next year.
The SEC's proposal, a modest one made after careful thought, deserves implementation. Only those companies that deserve to be disrupted will be.
Ray is president of Heritage Capital Advisors LLC, an investment firm based in Atlanta and Memphis.
© 2004 American City Business Journals Inc.
