No Shareholders’ Spring

CHICAGO – The ongoing global economic crisis is not only causing incumbent governments to lose elections; it is also shaking corporate boards. When stock prices and profits seemed to defy gravity, shareholders’ meetings resembled American political conventions: a show to promote a company’s image, rather than a forum to debate contentious issues. This year’s round of annual general meetings has been different. Frustrated by low returns, investors are much feistier.

At Credit Suisse and Barclays, for example, more than a quarter of shareholders rejected the pay package proposed by management. At Citigroup, a majority of shareholders rejected managers’ pay at Citigroup – the first S&P 500 company at which that happened.

Shareholder activists can also claim other (at least partial) victories at Yahoo!, where a shareholder activist forced the newly appointed CEO to resign for falsifying his educational credentials.

But many commentators’ hyperbolic depiction of a shareholders’ spring, with its resonance of ousted Arab dictators, is inappropriate for several reasons, not the least of which is the fact that the Arab Spring actually toppled regimes. At the moment, the current shareholders’ revolt is failing to achieve any significant result.

For starters, the votes on company mangers’ pay are non-binding. To be sure, compensation committees and boards tend to follow shareholders’ wishes, even if they are not legally obliged to do so. But they do so mostly out of embarrassment and a sense of guilt, and the changes can be entirely cosmetic. For example, after receiving only 43% of shareholders’ support, Bruce Gans, an independent director of Hospitality Properties Trust, resigned. The company then quickly invited him to rejoin the board, filling the vacancy created by his own departure!

When describing shareholders’ struggle to make board members accountable, the right analogy is not the Arab Spring, but the protests at Beijing’s Tiananmen Square two decades ago. In 1989, the Chinese Government sent troops to repress the country’s pro-democracy movement. In a similar vein, the Business Roundtable, composed of CEOs of major US corporations, has deployed brigades of lawyers to squelch shareholders’ aspirations.

One of the (few) positive achievements of America’s Dodd-Frank legislation, enacted to address the causes of the financial crisis of 2008, is – or should have been – the requirement that the US Securities and Exchange Commission repeal the current rules that prevent institutional investors from appointing their own representatives to corporate boards. In fact, the requirement was very timid, posing so many restrictions in terms of quantity and length of ownership as to leave the bar to institutional investors effectively in place.

Still, it was too much for the Business Roundtable, which sued the SEC to stop it. Argued by Eugene Scalia, the son of US Supreme Court Justice Antonin Scalia, the case against the SEC was won in the US Court of Appeals, DC Circuit, on a technicality – the SEC’s failure to conduct a cost-benefit analysis ahead of time.

This small victory turned into a major defeat for shareholders when the SEC, rather than performing such an analysis and re-proposing the rule, chose to stall. At a conference last December, I asked SEC Chairwoman Mary Schapiro when her agency was planning to reintroduce the rule. I even offered to do the cost-benefit analysis for free. But she confessed that the SEC had many other items on its agenda, and had placed the issue on the back burner – a polite way to say that the SEC, like the heroic students in Tiananmen Square, had surrendered under irresistible pressure.

The violent repression in Tiananmen Square set back China’s move toward democracy by at least 20 years. Let’s hope that does not mean the same thing for shareholder democracy. This is not a shareholders’ spring: it is the winter of their discontent.

Luigi Zingales is a professor of entrepreneurship and finance at the University of Chicago Booth School of Business and author of A Capitalism for the People, to be published in June.

Copyright: Project Syndicate, 2012.www.project-syndicate.org

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