Financial Times, July 11, 2011 column
July 11, 2011 9:28 pm Baby steps won’t fix US governance By Andrew Hill Recent progress in shareholder democracy is bound to come up, when the US Senate banking committee meets on Tuesday to assess how investor protection has improved since the financial crisis. At this year’s annual meetings, investors have used new “say on pay” rules – fruit of the year-old Dodd-Frank financial reform legislation – to protest against executive remuneration. They rejected pay packages outright at Hewlett-Packard, for example. Others, including General Electric, enhanced disclosure or tightened incentive conditions in advance, under investor pressure. Companies and their owners are opening up to each other, in what looks like a break with the US’s long adversarial tradition in shareholder relations. But these are baby steps. Resistance to more active oversight of executives still starts at the top. In his 2007 book The Age of Turbulence, after examining the Enron and WorldCom scandals, Alan Greenspan wrote that “given the shareholder-management divide, the autocratic-CEO paradigm appears to be the only arrangement that allows for the effective functioning of the corporation”. The former Federal Reserve chairman’s reputation has taken a ferocious battering, but his blithe pre-crisis assumptions about the danger dissident directors and shareholders pose to a coherent corporate strategy live on. Consider, first, just how weak the proposals spawned by the Dodd-Frank reforms really are. The legislation cleared the way both for “say on pay” and for another Securities and Exchange Commission rule on “proxy access” that would allow investors to add their own nominations for director to the annual proxy statement sent to all shareholders. But the pay votes are non-binding, meaning companies can, and do, ignore them. The proxy access rule can only be used by shareholders who have owned collectively 3 per cent of a company for at least three years. Based on Bank of America’s current market capitalisation, investors would have to hold more than $3bn of securities before they could effectively canvas the remaining 97 per cent of investors – who, remember, would still be free to vote against a slate of candidates consisting of, say, Karl Marx, Gandhi and Jimmy Hoffa. Corporate America still reacted with horror. The US Chamber of Commerce said the rule would give special-interest groups “significant leverage over a business’s activities”, “handcuff directors and boards”, infringe states’ rights and “undermine a company’s ability to grow and create jobs”. The chamber and the Business Roundtable, which lobbies for US chief executives, have sued the SEC, leaving the rule in legal limbo. Despite entrenched corporate suspicion, governance in the US has edged forward over the past quarter of a century. Headhunter Spencer Stuart, which published its 25th annual Board Index last year, said its analysis of S&P 500 companies’ proxy statements showed the ratio of independent to non-independent directors had increased from three-to-one to five-to-one over that period. The proportion of boards that elect directors to one-year terms has risen to nearly three-quarters, and 71 per cent of boards now expect directors who don’t get a majority vote to offer their resignation.
Given the obstacles to sustaining best practice in governance and shareholder engagement, this sounds positive. The US is a huge country with a fragmented shareholder base. Further, as the suit against proxy access shows, the temptation for both sides to revert to the courts when investor relations go bad is deep-seated. Even the more open “say on pay” talks are mediated through companies’ general counsel. But it is still extraordinary that corporate America shuns basic governance necessities, now commonplace in Britain and other markets. Some will argue that shareholder democracy and rigorous board oversight – whether applied with a US or a UK twist – failed to prevent tragic mis-steps by Lehman Brothers or Royal Bank of Scotland in the last crisis. But if the US again places its trust in the autocratic instincts of a new generation of corporate leaders, it will lay the foundation for the next one. Look again at that Spencer Stuart figure on majority voting and turn it round: 29 per cent of US boards still let unpopular directors tough it out, even after being rejected by the owners they serve. Some democracy; some progress.
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