August 28, 2007
August 28, 2007
Ladies and Gentlemen:
While most directors are capable and effective, in America they belong to a lucrative, exclusive club quite above reproach by the vast majority of stockholders. Occasionally, nearly absolute director power corrupts nearly absolutely, because stockholders have only rarely been able to remove a director. Recent advances in majority voting are helping.
But there is an inverse correlation between high CEO pay and firm performance. Unhappy stockholders in underperforming corporations usually have only 3 practical options: complain, sell or sue. We need positive options.
The proposed 5% ownership requirement to nominate directors is a small positive step, but still too high a threshold to replace directors who fail. Even if a firm's 10 largest stockholders agreed in advance on one or more director(s) to nominate, these 10 would still often control less than 5% of shares outstanding in the larger Fortune 500 firms. The Council of Institutional Investors, 8/24/07 p.3 supports this in detail on this website.
My research indicates that a 1% ownership requirement to nominate makes more sense, since shareholders at this level usually have a very significant amount of their net worth on the line.
Offering practical solutions, John A. Claras wrote an outstanding 1 page letter on this website dated August 3, 2007. I believe that adding some stockholder control to ownership is both practical and right.
I also encourage the SEC to give the benefit of the doubt to the relatively few shareholders who put forth stockholder resolutions for annual meetings. Most are long term investors who are trying to maximize net worth.
Last year, the SEC allowed Bank of America to avoid any penalty in not placing my resolution on the shareholder proxy. I simply wanted BAC to ask stockholders if they prefered a Friday, Saturday, or Monday annual stockholder meeting time to the typical Wednesday morning time, when most working stockholders cannot attend. Since I took the idea from Warren Buffett, it deserved a chance.
Unfortunately, the SEC said that the resolution fell under the ordinary business of the firm. I asked the SEC what is less ordinary than the one day per year when small investors can ask questions of the directors and top executives that work for the owners.
Most firms have inconvenient annual meeting times for the shareholders. Thankfully, most firms seem to try harder for their customers. If the owners had more real control, I believe that the directors and top management would treat them better, making American capitalism more efficient, effective and profitable for typical stockholders.
Frank Coleman (Cole) Inman
Corporate Governance Adviser and Former Business Professor
600 Cherry Drive #3
Eugene, Oregon 97401-6644