eRaider.com Inc. response to
June 12, 2003
Jonathan G. Katz
Dear Mr. Katz:
We strongly support efforts to make corporate elections fairer, including the changes we requested in our cyberpetition (http://www.sec.gov/rules/petitions/petn4-465.htm) last September. Everyone knows what a fair election is: all candidates have equal access to the ballot, corporate funds cannot be used for partisan campaigning, poison pills cannot be invoked for normal election activities, incumbents cannot use control of the election process or corporation itself to gain advantage and unvoted shares do not count for any candidate. On the last point, we distinguish between shares held by a mutual fund or pension fund in which beneficial owners intentionally cede voting control to agent managers, and shares held in "street name" for brokerage firm convenience in which beneficial owners do not intentionally cede voting control.
You have received plenty of comments arguing forcefully for corporate democracy, we add only our agreement with these. You have received a few comments, mostly from clear beneficiaries of the current system, arguing against corporate democracy. We limit ourselves to the response that these are exactly the same arguments used against civic democracy and a quarter millennium of bitter experience has shown them to be wrong. We trust democracy for decisions about war and peace, and trillions of dollars of expenditures, we can trust it to run a business. Millions of people have died fighting for democracy, we're not going to waste sympathy on corporate insiders who cannot win majorities.
eRaider.com expects to be one of the main beneficiaries of any rule change. We are long-term shareholders and have proven our ability to mobilize large numbers of fellow shareholders cheaply. We have successfully passed shareholder resolutions, gained ISS recommendations for our changes and used election pressure to gain governance improvements and negotiated board seats. But we have been unable to win a single director seat in a contested election. We have come close enough that we have no doubt any slight easing of the rules would make the difference: eliminating broker voting, allowing access to the corporate ballot or limiting management spending of corporate funds on partisan electioneering and legal harassment of candidates. Even without a change in the rules we expect to win one eventually, but an organized majority of serious long-term shareholders should not have to spend large amounts of money, risk lawsuits filed against them by their fiduciaries, and wait years to gain minority representation on the boards of their companies.
Today we have a vicious circle. Elections are rigged so shareholders don't pay attention. Without shareholder attention, there is no demand for press coverage or other information about board performance. The only information shareholders can make use of, and therefore the only information they will pay for, and therefore the only information that gets produced, concerns whether to buy or sell the stock. Incumbents then argue they must rig the election to protect against irrational decisions by ignorant short-term shareholders. Serious shareholders can move to private equity, where owners get respect, or index funds. The public securities markets cannot remain efficient for long if serious shareholders either leave or stop paying attention to individual companies.
The good thing about a vicious circle is you can turn it around to a virtuous one. If the SEC can reduce the degree of election rigging by even a small amount, some insurgent shareholders will win. Other shareholders will pay attention, and create a demand for press coverage and other information. That, in turn, will draw in more shareholders and make it easier to win elections. More shareholders will become well-informed and vote for change instead of selling when things go wrong. This will draw a large base of serious, knowledgeable, long-term shareholders back to the public securities markets. Those shareholders who do not like the effort of paying attention may be upset about the changes, they can move to index funds which is where they should be anyway. Some managers will not like being accountable to the public, they will move to private firms, which is where they should be anyway. Everybody wins.
History does not support the argument that the current system can continue to function. Before the security market reforms of 1933 to 1940, dispersed public ownership did not work, and that fact almost destroyed the economy. From the end of WWII to the mid 1960's, the first generation of SEC-regulated boards worked, and produced an economic miracle. But from the mid 1960's to the early 1980's the system, and therefore the economy, stagnated, producing negative real returns to shareholders. It became common for public corporations to invest in negative real return projects, hoard unnecessary assets and use excessive equity capital to insulate the company and its insiders from market discipline. Raiders shook things up in the 1980's, and ushered in an era of extraordinary corporate performance, but poison pills killed them. An equally dangerous development is the scale of insider abuse. Entrenched CEO's before 1990 were happy to extract a million dollars a year, today hundreds of millions in compensation is routine. Many insiders extracted more money in compensation from their companies in the 1990's than the total market capitalization of the company remaining today, without ever winning a fair election.
Some corporate boards today are composed exclusively of holdovers, insiders, professional directors and mental no-shows. Adding one energetic, concerned, serious shareholder to that mix cannot fail to help. Other boards are good and will either defeat challengers in fair elections, or work with anyone the majority of shareholders support. But the biggest effect of democracy is on the large middle class of boards that have the necessary skills but need to get more active and creative in their oversight.