Zach Carter hits on something interesting about shareholder democracy in The Nation this week (disclosure-longer-than-this-post: I wrote a piece for that magazine; Victor Navasky, CJR’s chairman, is its publisher emeritus; and The Nation Institute partly underwrote a story for us. Phew. Good thing this post doesn’t involve Goldman Sachs. And yes, we also read The Weekly Standard )
Where was I? Oh, right, shareholders.
It says in the headline that:
Shareholders Alone Can’t Correct ‘Too Big to Fail’
…and the story goes onto assert that they, alone, won’t be able to constrain bloated executive pay packages or incentives that reward short-term risk taking.
As Carter points out, there is obvious appeal in the idea of applying shareholder democracy to restrain bad practices, starting with the fact that the government’s record at this vital task isn’t all that impressive. Why not give market participants a crack at it?
We’ve just watched several regulators, from the SEC to the Office of Thrift Suspension to the Federal Reserve, fall down on the job—maybe shareholders who want to see a good return on their investment will exercise more prudence. For many companies, especially at small- and midsize banks, a stronger set of shareholder rights really will help curb corporate abuses. The savings and loan crisis was largely a story of small-bank executives looting their own companies at shareholder expense. The SEC has been far too complicit in allowing management teams to stack the deck against shareholders for far too long, steadily transferring power from those who own companies to those who run them—and blessing whatever lobbying interests the managers might find attractive in the process. In 2007 the SEC issued a rule that made it almost impossible for shareholders to challenge corporate directors in elections, allowing management teams to seal themselves off from shareholder criticism. This past May the SEC proposed amending the rule to allow shareholders to directly nominate directors, but this has not yet been enacted. Congress really does need to restore a set of meaningful shareholder rights.
Shareholder democracy is one of those apple pie issues. Not many people are against it. Gretchen Morgenson is a big believer in it, and advocates for it in her columns regularly. This New Yorker profile (subscription) of governance guru Nell Minow puts a lot of stock in the idea as way to solve what it calls “The Pay Problem.”
Carter, though, argues that investor interests can be at odds with the public’s.
But at major US banks, the public good and the interests of shareholders are in a fundamental state of conflict. “Too big to fail” financial behemoths have been the source of all the recent bonus outrages; and at “too big” firms, shareholders actually want their executives to be rewarded for taking on excessive risk. It’s the smart bet. If the risk pays off, the bank’s stock price soars. If the risk backfires, the government will spare shareholders from losses. You can’t solve a problem by punting the issue to the very parties who benefit from the imbalance.
Well, I’m not sure I go along with all of this. Investors making this bet would have been big losers in the case of Bear, Lehman, AIG, Fannie Mae, and Freddie Mac, to name five very big firms. An uncertain guarantee isn’t much of a guarantee.
But the larger point—of conflicting investor and public interests—strikes me as important for journalism because business-news organizations typically cast themselves, correctly, as defenders of investors against managerial manipulations. This is a good thing. Indeed, you could argue that this is what business journalism does best. Pick your own favorites; mine would include work like this excellent Wall Street Journal story from 2008 exposing Lehman managers’ fibs about the bank’s financial condition before the fall; hard-hitting probes into dubious small-company stocks, like this one by Bill Alpert of Barron’s, or come to think of it, almost anything by Fortune’s Carol Loomis, including this 2005 classic on Hewlett-Packard.
But increasingly, I fear, business journalism believes its mission stops with serving investors, as Damian Tambini of the London School of Economics found in this study of the business press last year, and may sometimes even conflate investor interest with the public’s.