July 1, 2010
Based on what I've seen, the comments are split into the groups of management (and directors, including academics who serve as directors) and shareholders (also including academics). As I'm not management, I take the view of the shareholders. I have never really understood how I can have any impact when I'm only presented with directors who represent the status quo. How then can I vote no confidence on the board? The issue of withheld votes as a vote of no confidence has been discussed ("Do Boards Pay Attention When Institutional Investor Activists 'Just Vote No'?" http://papers.ssrn.com/sol3/papers.cfm?abstract_id=575242) with some evidence that withheld votes put pressure on management, but ultimately a withheld vote is ambiguous.
I'll offer a couple concrete examples. I recently bought into a small company (NASDAQ:ALTI) which is about 90% down from its highs. I don't entirely blame the management, but one thing that's jarring is that the company pays its HR executive, who overseas about 60 people, a base salary of about 200k. Same for a generic "Corporate Strategy" executive. This is a technology company which desperately needs to hire high-priced technical staff. But, although I bought too late to vote in the proxy statement, even if I had been able to vote there were no real outsiders to vote for to express displeasure. There is no accountability for management. To take another more startling example, Majestic Insurance Company (until recently CRM Holdings) is rapidly nearing bankruptcy. While doing due diligence I discovered that after running the company into the ground and doing contract work which led several self-insured groups to rack up hundreds of millions in liabilities, CEO Daniel G. Hickey Jr. promptly resigned with a golden parachute which will allow him to buy the company several times over. The injustice of the Majestic result haunts me, but clearly these are typical occurrences.
The issue of accountability of management in government bureaucracies, which function similarly to the bureaucratic management of modern corporations, has long been a question. The Roman poet Juvenal asked: "Who watches the watchmen? (Quis custodiet ipsos custodes?)". For the SEC, the inspector general, the White House, and Congress watch. But ultimately, in a society like ours, the watcher of the watchers is the people at large, and if the people are crippled in their power, the management will take advantage of the freedom.
I urge the SEC to stand firm in its commitment to giving shareholders a basic democratic choice. The impact of this expanded power could be enormous Lucian Bebchuck has identified increased shareholder power as likely the most effective reform for corporate governance (see, e.g., "The Case for Increasing Shareholder Power" Harvard Law Review 2005 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=387940).
With great hope,
I am professionally affiliated with the State of Alaska Division of Insurance as a rate and form regulator, which does not involve corporate governance to any meaningful degree, and my opinions are my own.
PS: On another note, the SEC needs to revise its technical system for displaying comments. I should be able to submit a subject line, and that subject line should be viewable at a glance.