(From Robert A.G. Monks' blog, http://www.ragm.com .)
And the answer is…. I still don't know
In looking back over the recent blog posts that I called “Appearance of Reality,” it occurs to me that several anomalies in contemporary Corporate Governance are worth mentioning. I had hoped to solve some of these inconsistencies — at least in my own mind but many questions still remain about some key corporate governance ideas and terms. I hope you'll respond with you thoughts on these points.
1. We read endlessly about the “turnover” of shares – more than 100% of the outstanding every year – as evidence of the fickleness of shareholders and of their lack of entitlement to be treated as “real owners.” On the one hand, we read of the high speed computer-driven trading programs, and on the other of the approximately 33% of all shares being held in index funds (or closet index funds). This creates a range from perpetual motion to virtual inertia so the average (or the mean) is virtually meaningless. The question I have is: what is the turnover rate for shares that are purchased pursuant to the decision of flesh and blood investors?
2. CEO tenure is now briefer than ever before. This is adduced as evidence of the fragility of their status. Occasionally, the details of the “termination arrangements” for CEOs are made public and some suggest that CEOs make more money by quitting and collecting on the acceleration of various “long term” rights than in continuing to work and taking their chances on stock prices in the future. Should we conclude that these generous provisions are appropriate recognition of the “risks” assumed by a CEO or should we view them as evidence of the asymmetrical power of CEO’s and an important, if inadvertent, force for merger or sale?
3. “Shareholder rights” may be in competition for the ultimate oxymoron. Evidence of this is in the magisterial language of the United States Supreme Court: Justice Kennedy in dismissing concerns of minority shareholders who disagreed with specific corporate political contributions concludes that, “There is little evidence of abuse that cannot be corrected by shareholders ‘through the procedures of corporate democracy’.” He also speaks of the transparency of political contributions which enables “the electorate to make informed decisions and give proper weight to different speakers and messages.” Reality, of course, is that the references to shareholder democracy and transparency are at cruel variance with the observed practice by which management give large sums to intermediate “laundries,” like the U.S. Chamber of Commerce, with no indication as to the identity of the ultimate recipient. The Supreme Court has simply ignored reality in concluding that the present practice of corporate governance provides meaningful protection for shareholders from the improper political use of their property.
4. The complete failure of Dodd-Frank to provide meaningful shareholder reforms stems from government focus on continued functioning of the stock market rather than with the workings of corporate governance. Or, John Cioffi put it this way in a summary of post-crisis reform: “Shareholders were marginalized within corporate governance, their interests framed and protected as participants in the stock market rather than in a firm”[1]
5. “Sophisticated investor”, “fiduciary duty”, “independent director”, “long term investor” are concepts that advertise a mode of conduct that is, for the present, at variance with the practice. Why is there such wide spread and deliberate use of terms contrary to what informed people know to be the truth? Who benefits?
6. There is endless blather about the risks of liability for persons serving as director of public companies. It is the custom for corporations to indemnify directors against liability and it is the practice for companies to purchase Errors and Omissions insurance to fund any such liability. There are cases when both company and insurer become bankrupt and the question of director liability is real. Over a lifetime of some fifty years, including service on the boards of a dozen publicly companies, I can call to mind only a handful of instances where there was final adjudication of liability. And, I know of only one or two in which the individual director has actually had to pay money out of their own pockets.
Ultimately, corporate governance is a modality in which critical words and categories are accepted in practice, notwithstanding their use contrary to accepted meaning. Why does this practice exist? And, why is there so little effort to confront the unnecessary problems it creates?
[1] John Cioffi, Public Law and Private Power, (Cornell, 2010), at p. 91
(BDTI comment: While his answer is very honest, actually Bob knows more than his title lets on. He is right: the words have to mean something close to what they suggest. Since they don't,we really are at the point when have to starting looking for other words, and that quest will inevitably exposecontradictions that have been allowed to persist through cooption of the political and governance process by its participants.)
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