CII conference takes up dual-class stock, high-frequency trading

The pros and cons of dual-class stock and high-frequency trading were the subject of lively debate at the spring meeting of the Council of Institutional Investors in Washington.

The council represents pension funds and other institutional investors advocating for corporate governance and shareholder rights.

The April 17-19 event included the first meeting of CII's new advisory council, whose 15 non-voting members represent some of the largest institutional investors outside the pension fund community, including BlackRock Inc., TIAA-CREF, State Street Global Advisors and T. Rowe Price Inc.

“The board wanted to make sure our non-voting members are more connected to the council, to gain from their ideas for strengthening CII corporate governance activities, and to bolster CII's voice on 'big tent' corporate governance issues,” said CII Deputy Director Amy Borrus in an interview.

CII has taken a position against multiple classes of common stock with unequal voting rights, and has asked both the New York Stock Exchange and Nasdaq stop new listings of companies with dual-class stock.

“What I see (is) that shareholders are powerless,” said Anne Simpson, senior portfolio manager and director of global governance for the $258.3 billion California Public Employees' Retirement System, Sacramento, who moderated the governance panel. “Why do we buy non-voting shares?”

“You want to go where the returns are,” answered Lynn Stout, distinguished professor of corporate and business law at Cornell University Law School, Ithaca, N.Y. “The ugly truth is that we keep taking the same medicine and the patient keeps getting sicker.”

Manoj Narang, founder and CEO of Tradeworx, an equity hedge fund and high-frequency proprietary trading business in Red Bank, N.J., defended the practice of high-frequency trading, saying, “I don't think the market in any way is unfair.”

But Andrew Brooks, vice president and head of U.S. equity trading for T. Rowe Price suggested that, given the burdens high frequency trading places on the system, “maybe there should be some charges.” Mr. Brooks suggested a pilot program to consider possible reforms, including a one-second or more hold on orders, and monitoring of quote-to-trade ratios.

A regulatory update panel found continuing debate on the practical and legal concerns over requiring cost/benefit analysis of rulemaking. Salman Banaei, counsel for the Commodity Futures Trading Commission, said new derivatives execution rules expected out by the end of May “will determine the scope of the procedures that market participants will (use to) execute their trades.”

On the question of whether corporate governance adds value, Cornell's Ms. Stout said: “I have become increasingly convinced that we are dealing with structural problems. We're getting collective behavior that is reducing the return, (and) companies are reluctant to make long-term investments that generate long term growth.”

Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, said that with a shift away from long-term value, “boards have disintegrated into advisory groups.”

One scheduled speaker not heard from was Daniel Loeb, founder and CEO of Third Point LLC, who withdrew in the face of a report from the American Federation of Teachers linking some money managers, including his firm, with organizations that seem to be opposed to defined benefit plans. In a letter to CII, Mr. Loeb said his support and contribution to defined benefit plans “is demonstrated by maximizing returns for union members who rely on us to deliver their pension goals.”

CII members also approved a new policy on audit committee responsibilities regarding independent auditors. “We established a framework for audit committees to consider when selecting audit firms that will truly help audit quality and audit performance,” said Gregory Smith, executive director and CEO of the $40 billion Colorado Public Employees' Retirement Association, Denver, who chaired the audit group.