Home > Shareholder Activism > Symbolic Corporate Governance politics: what is activism about?

Symbolic Corporate Governance politics: what is activism about?

There are a number of Corporate Governance controversies that seem more an intellectual or theoretical “amusement” that an actually relevant matter for shareholder value, or whatever firm goals can be defined. But instead of remaining in the academic debate, those topics appear as the main activist or shareholder concerns, if the shareholder proposals are to be considered.

In “Symbolic Corporate Governance Politics”(1), Marcel Kahan & Edward Rock devote their efforts to understand what the significance of this range of themes is, after they assume the economic stake is not the key factor for the controversy.

 

The authors firstly review the main Corporate Governance topics where shareholders concentrate their proposals, and they conclude that material or economic stakes are often minor. For instance:

  • Poison pill proposals: while (activist) shareholders often submit redemption or shareholder vote proposals for this feature, it is seldom a relevant subject. The poison pill defendants assert it is a useful tool for shareholders to protect themselves against “short-termism” or to extract all value from their shares in takeover events. But poison pills can be implemented when the event takes place with little effort and cost, so the recurrent proposals make not really sense…unless they ask for charter provisions blocking the boards` ability to implement such pills, …but they don`t usually ask for that….why?
  • Proxy access: activists have for long been seeking to be granted proxy access to nominate directors. But when shareholder resolutions were accepted as a tool to regulate proxy access, activist proposals asking for these resolutions were not as massive as it could have been thought.
  • Majority voting (against plurality voting): although in principle a reasonable change, the fact is that uncontested directors were not usually elected by one vote but by a majority, resignation offers could prevent some undesired results, and generally in both cases effects of a not majority vote boil down to the board reaction.
  • Shareholder proposals seeking to eliminate Supermajority provisions: its relevancy depends on what provision faces supermajority requirements, and the once that are attacked are not always the most relevant.
  • Mandatory proposals: although proposals can be introduced as precatory resolutions or as mandatory bylaw amendments, the case is generally the former, which is the least shareholder friendly way, as the board can attend or not the approved proposal…why do shareholders do it that way?

It is critical for the authors`s argument that these shareholder actual engagements are actually materially irrelevant, and I would personally say some of the explanations above could to some extent be questioned.

Secondly, the authors try to understand why shareholders focus on these aspects, with such an irrelevant material or economic value for them, and why do boards resist them?. They argue there may be several explanations, possibly all of them playing part of the game:

  1. False perceptions: probably rank and file activists could genuinely believe that their actions could end up having a material effect, but this is not the case of proxy advisors, institutional investors and their advisors.
  2. A public interest explanation:
    1. activists could think these battles are a matter of principle, to lead directors into a shareholder oriented activity,
    2. or these irrelevant battles could be an effort to show strength both to the general audience (through the mass media) in order to gain lobby capacity, etc.
    3. Perhaps activists see their activity as a multi-year one, so that the first initiatives need to be succesful, but not necessarily material.
  3. Public Choice explanations: it could also be that some agents simply pursue their own benefit and agenda; proxy advisors, lawyers, all have some vested interests in looking for rents in these battles. This explanation though supposes there are rents to be appropriated by them, so that these battles have more material effect than discussed above.
  4. What goal is then the corporate governance industry serving?
    1. Politics as folklore. In the early XX century Thurman Arnold issued the idea that law and politics don`t really pursue the declared objectives, but others, so that regulation and political activity is more of a show where the true ends are unveiled to most people. So, activism could be a way to practically recognize this fact and adapt to this reality, following the rituals and taboos that characterize political activity. Corporate personality was for instance accepted to reconcile big corporations with the belief in entrepreneurship. The hidden ends could be both the public or the private good, (rent-seeking).
    2. What is the conflict in which the Corporate Governance industry provides the rituals and folklore? The defense of individual shareholders is not anymore a real thing; most of the shares are owned by institutions; these shareholders don`t really control managers; and true defendants of individual shareholders are badly considered, (hedge funds). So the myth conflicts with reality, and a procedure was needed to constantly attack managerial agency costs (executive compensation, etc), not to fight the reality needed for prosperity, that is, large amounts of capital controlled by managers. In connection with Arnold`s views, if activists really attacked material parts of the way corporations are governed, they could generate real damages to an established and prosperous capitalist economy.

Thirdly and finally, the authors try to extract some implications:

  1. Corporate governance controversies should not be taken too seriously.
  2. Activists looking for proxy access have not really battled against brokers voting nor in favor of proxy access expenses reimbursement, which rather than proxy access regulation itself, was the material obstacle to their declared end; basically they just have fun and are not devoted to reach material objectives in Corporate Governance.
  3. Managers and Corporate governance advocates are both economic agents pursuing their own goals, not generally aligned with those of shareholders, which even when owning large stakes remain absent in the CG battles.
  4. The Corporate Governance in the USA, as the illusion of shareholder control has been established, remains stable; activism is part of the rituals needed to make us all believe in shareholder control. But in fact, power in corporations is in the hands of a small group who “are not the beneficial holders of equity interests”. The Ceo`s are the main guys, together with the more assertive outsider directors, major private equity firms and hedge funds, and major institutional investors`s managers. Battles in not relevant topics are won or lost, but in the fundamental issues nothing is really moving.

Kahan and Rock start their propositions with something quite reasonable, the fact that many of the Corporate Governance battles affect not material aspects of the way firms are managed and governed. Not all their arguments should be shared, but probably they are right. Nevertheless, their acid conclusions are difficult to share; in particular not in all cases the capital control by Ceos and the like has been a good solution, and not always there has been a sufficient level of checks and balances by those who (as the authors say) should be introducing them, (institutional funds, private equity firms, and the like).

At the end, not even them are separated to have their self-interest!

(1) Kahan, Marcel and Rock, Edward B., Symbolic Corporate Governance Politics (January 17, 2014). U of Penn, Inst for Law & Econ Research Paper No. 14-6; NYU Law and Economics Research Paper No. 14-07. Available at SSRN: http://ssrn.com/abstract=2404530 or http://dx.doi.org/10.2139/ssrn.2404530

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