It is too soon to put limits on US shareholder democracy

March 25, 2014 1:33 pm by Andrew Hill

Has shareholder democracy in the US gone too far? The very idea seems risible to Europe-based corporate governance advocates, myself included, who have watched American investor rights advance in a good direction, but at a snail’s pace. But those making the case now for limiting investor powers have a strong, prominent, and eloquent ally in Leo Strine, Delaware’s chief justice. His latest Columbia Law Review article, ostensibly arguing for a pragmatic version of investor democracy, is a must-read.

Mr Strine is a class act. His 130-page 2004 judgment on Conrad Black, which described the media magnate as “evasive and unreliable” sticks in the memory (as it does, apparently, in Conrad Black’s: he told the FT in 2012, following his release from jail for securities fraud and obstruction of justice, that the judge was “a ghastly little twit”).

In the new article, Mr Strine takes on his friend and adversary Lucian Bebchuk, perhaps the highest-profile academic lobbying for further investor powers. Prof Bebchuk has lumped Mr Strine in with so-called “insulation advocates”, who he claims protect highly paid managers from investor pressure. Mr Strine, with characteristic dry wit, in a footnote, refuses to accept the description, “except insofar as he is saying that I accept that it is important for responsible citizens and good consumers to insulate their homes adequately to keep their homes warmer in winter and reduce unnecessary energy use”. (Elsewhere in the entertaining footnotes, the judge cites Eddie Cochran’s song “Summertime Blues” to support one point and ponders whether Abraham Lincoln would have won re-election in 1861, 1862, and 1863, if subject to annual votes, as corporate directors now are – probably not, he concludes.)

Mr Strine does point out, rightly, that there are flaws in shareholder democracy in the US. For instance, “the segment of the investment community that is best positioned to vote with an eye toward sustainable value creation [i.e. index funds] is the least active in exercising voice and judgment in American corporate governance”. He proposes that index funds should have to adopt voting policies that reflect “the unique permanent investment philosophy of their investors”, while reducing their reliance on proxy advisors such as ISS.

On the votes themselves, he suggests changing elections from annual events to three- or four-yearly polls:

All this will comfort US directors and executives who fear the consequences of what Mr Strine describes as “direct democracy” of investors, particularly the rise of short-termist investors. But US boards still enjoy some remarkable protections from companies’ ultimate owners, and while I can see that the buzzing of activists is an annoyance and a distraction, I remain unconvinced that activism is a plague on the US economy. As I wrote in a recent column, citing recent research on categories of activism by Dionysia Katelouzou of King’s College London:

Mr Strine makes a compelling case for review. But I fear that measures to curb the irritating short-termists could also kill off those shareholders who are well-informed and committed to their companies for the long term. Worse, they could be used by more radical opponents of US shareholder democracy to destabilise the movement before it has found its footing. Over to you, Prof Bebchuk.