Shareholders aren’t regulators

By Felix Salmon
September 16, 2009
Eliot Spitzer is surely right about this:

Our market has been--and will continue to be--undermined by regulators who are intellectually or ideologically unwilling to confront powerful market players.

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Eliot Spitzer is surely right about this:

Our market has been–and will continue to be–undermined by regulators who are intellectually or ideologically unwilling to confront powerful market players.

I can’t agree with him, however, about his proposed solution to the problem:

Instead of adding bureaucracy, we should be using the government to help invigorate shareholders to police companies. They should be empowered to control executive compensation, eliminating all the conflicts that now encumber those decisions.

Shareholders, like all stakeholders, will make a better determination about the use of their capital than bureaucrats who don’t ever suffer the downside of a bad investment. We need to facilitate opportunities for shareholders to actually participate in key decisions, and to deny those whose interests are not aligned from hijacking them. Strangely, we’ve heard a lot about executives and bureaucrats in this moment of reform. But shareholders, a force integral to the integrity and vitality of markets, have largely been left out of the discussion. We need them now more than ever.

Shareholders simply don’t have the time, information, or ability to do this: they’re owners, not managers. And they certainly have no way to address systemic, as opposed to company-specific, risks. Federal and indeed international regulations and regulators are absolutely necessary; the only question is whether they will be sufficient.


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Indeed, Felix, it is a stupid idea.

In fact, someone or other–Lucien Bebchuk, methinks?–has made the very good point that shareholders were complicit in the dangerous levering up of publicly owned financial institutions in pursuit of higher returns. Given diversified portfolios, public shareholders should be even more indifferent to firm failure than their employees.

Spitzer seems to be trapped in the late 1990s/early 2000s “as long as you give ever more disclosure to the poor shareholders everything will be alright” mindset. He completely misses the point.

It’s not an ideal solution, but given that the government refuses and/or is unable to regulate publicly owned companies, we don’t have many other viable options. Adding more regulators who will continue to not enforce or not understand the issues will not solve any problems.

And while 99.9% of shareholders may not be qualified to perform the oversight function, the 0.1% who are, and who own maybe 10% of the publicly traded companies, have incentive to enforce accountability. What they don’t have is any teeth. Arming them with certain rights will force execs to stop ignoring dissenting shareholders.

Of course, if shareholders are profiting from companies that are breaking laws, this will not stop that kind of behavior.

Or we can just do nothing and cry the next time a company defrauds stockholders or breaks the law.

Posted by KenG | Report as abusive

We need proxy aggregators. I would gladly pay an organization that would vote my interest. I should be able to do this through my web based brokerage account on any of my holdings.The organizations could be for profit or non-profit.I would pick to maximize longterm gain while others may have other criteria. Transparency of votes is a given. The proxy relationships would be indefinite in time but revocable .

Posted by lowrie glasgow | Report as abusive

We have too much stock indirectly in public hands instead of directly in public hands. Agency capitalism does not work. This is why directors do not consider the will of the stock-holder. We need a culture where Mr middle America invests in a company as a long term stock holder.

Posted by Sechel | Report as abusive

My plan above could be used for indirect holdings in funds considering our current computer power . Voting power could be given to the fund holder who would be able to select form a large list of organizations that would handle the holders proxy.

Posted by lowrie glasgow | Report as abusive

Can’t we do both? I very much support giving shareholders more power versus management, but that doesn’t, as you note, address the systemic issues, on which the government really ought to be ramping up.

I’m thinking that Mr. Spitzer is playing the angles here. He has no fear that if he were William O. Douglas to Obama’s FDR, that the two of them could put teeth into regulation, at least for a while. If only for Elliot’s private habit of self-indulgence and Obama’s public habit of refusing to make enemies…..sigh.

So, pursue strong regulation but push on the other side of the equation as well. It sure wouldn’t hurt our economy’s risk profile or productivity if shareholders managed to figure out that the principal activity of senior executives in American business is a daily game of kleptomaniacs’ circle jerk, and then shareholders decided to do something about it. It might actually clean things up a bit if derivative suits were revived and shareholders’ lawsuits were more common and more lucrative.

Finally, it’s great positioning to set the whole angle up as “let the market self-regulate.” After all, he almost sounds like Greenspan for a minute there, and what could be wrong with that, if you’re the WSJ editorial page?

So, push on this new angle, and of course, keep trying on the other. Maybe someday an honest person could be an EVP of a Fortune 500 company.

Posted by dollared | Report as abusive

Still, I think there’s a problem with the modern “absentee owner” shareholder. While in cases of concentrated ownership we expect that person to be responsible for the company, it is not clear (to me) that those responsibilities *really* end up with someone in a modern corporation. Perhaps you can cite the big institutional investors and claim the smaller folks are free-riders on their efforts? Seems less than the same to me…

Posted by Milo | Report as abusive

A couple of observations:

–Proxy aggregators already exist to an extent. Certain institutional shareholders will always vote the way Riskmetrics (formerly ISS) or Glass Lewis tells them to vote. Haven’t spent a lot of time looking at the materials that Riskmetrics and Glass-Lewis put out and having recently had to negotiate with them about certain positions they have taken with regards to a shareholder meeting, I think that they’ve been drinking too much of their own whiskey.

–I think that Salmon and several of the commentators are espousing the traditional observation that equity holders are in no position to govern corporations effectively. They don’t have the time to manage. Mutual fund managers and most other types of institutional shareholders also don’t have the time to manage. This is why guys like Ackman are, arguably, so valuable–but there can only be so many Ackman’s in the investing world.

–With regards to better or more regulation, the trick is to regulate in a way that doesn’t directly affect the market. For example, structural regulations (requiring segregation of client assets or segregation of business types) probably makes more sense than dictating things like capital and leverage ratios.

Posted by Brown Ram | Report as abusive

Regulators should be in place to make sure that same rules apply to everyone and also to enforce transparency. I, as an investor, want to be able to trust the system. We should simply hold everyone to the same standard.

Posted by Paul | Report as abusive