It looks as if the Securities and Exchange Commission is going to cave under corporate pressure and protect the members of the politburo, oops, board of directors, from the proletariat, er, shareholders.
The SEC has signaled that proposals to give shareholders a limited ability to nominate candidates for boards of directors are not going to be approved.
Investors will thus be left with a virtually meaningless vote on corporate issues. If a majority of shareholders withhold their votes from a director, or slate of directors, the board can ignore them. If the shareholders send forward a proposal backed by a majority, the board and corporate management can, and very often do, ignore it. As a result, shareholders are left with no way of signaling disenchantment with management other than selling their shares.
And that's often not an option for large institutional shareholders, such as index funds, mutual funds and large pension funds. Their positions are often so large that if they were to sell their shares, they would be killed by market impact.
Is there a fair way to give shareholders a meaningful vote on corporate proxy issues, including the election of board members, without making the companies vulnerable to ambitious politicians and union officials?
A way that comes to mind is to switch from one share one vote to one shareholder one vote.
That might alleviate a prime reason corporate management and boards of directors have given for opposing direct election of boards: the fear that politicians or unions controlling large blocks of shares through pension funds may be able to gain control of the boards for political or union purposes.
That's because public employee and union pension funds control huge numbers of shares of some of the country's biggest companies, often through index funds. The trustees of these funds thus control huge numbers of proxy votes.
A more likely reason is that shareholders, including the public pension fund officials and union bosses, might crack down on chief executive compensation, and CEO and board perks, but let's take management at its word.
What could be fairer than one shareholder, one vote? If Fidelity Magellan fund owns 250,000 shares in General Electric, it gets one vote. If the California Public Employees' Retirement System owns 1 million shares of GE, it gets one vote. If an individual owns 100 shares, he or she gets one vote. The same rules would apply to the shares corporate management controls.
Shareholders should have the right to vote for or against individual directors under this system, and management should be required to replace any director against whom shareholders cast a majority of votes. Shareholders should also have the right to vote down management proposals, and to offer their own proposals for a vote. Again, management should be required to accept the shareholder vote.
This would be true corporate democracy, and it would answer the concern of corporate management about the shareholder vote being dominated by one or two very large institutional shareholders with excessive clout and political agendas.
It would also provide some protection for the small shareholders that management sometimes claims it is protecting through its opposition to meaningful shareholder voting rights.
If shareholders knew their votes would count, and they could effect change through them, they might be more willing to be long-term shareholders and not sell at the first hint of problems. And corporate management and directors would focus more on keeping shareholders happy.